Why GOOD startups go under

Over the years, I've had to step in to try and rescue several startups. In this post, I highlight the most common reasons for drowning. Some lessons are better understood only through hindsight.?

Every founder is optimistic.

You could argue that startups die when you run out of optimism. Or the opportunity to remain optimistic doesn't exist anymore. It's easy to confuse the initial excitement with optimism.

Customer feedback reinforce your optimism. Excitement is a dopamine rush resulting from the 'status' of being a founder.

While 'optimism' fuels intellectual curiosity, 'excitement' makes us live in an already successful alternative reality. The consequence is that we miss out on the signs that scream danger.

Q: What is the one thing you must not compromise from day one?

Guy Kawasaki famously said, "don't worry, be crappy." I don't believe there's room for crappy products in this day and age. On one side, consumers/users are more knowledgeable than before. On the other hand, building great products has become easier than before.?

Your product needs to be at least 10X better than the closest competitor. Being cheaper isn't a value proposition that'll get users excited. You also need to demonstrate 'why' & 'how' your product is 10X better. It can't be an opinion.?

If you cared about solving the customers' pain points, you would not compromise on the product. So I don't believe you can correlate your failure to the product. In my view, founders need to get the product/market fit right. That is why we use the term 'founder.'

Q: How do you pick Co-founders to join your startup?

Passion, mutual interest & friendship becomes the basis when picking co-founders. These are weak factors that, more often than not, fall apart very quickly. The reason is that 'excitement' runs out, and 'life' gets in the way.?

Most founders I meet are spread too thin. They oversee multiple functions, and there's no clear ownership. You must pick co-founders based on their value addition and what needs to be solved. During your pre-seed and Seed rounds, you need a Product Owner (a.ka. the techie) & a Product Distributor (a.k.a sales). The person in charge of selling the product needs to bring feedback to the product owner. We know this as the Lean Startup Methodology. Your other co-founder needs to be good with numbers. You need to understand if the unit economics makes sense.?

Q: How do you know if they're the right Co-founders for your startup?

These three people should be independent thinkers. They should challenge each other and not accept facts as the truth. Each person should find purpose in solving the problem. Being passionate about entrepreneurship or starting a startup isn't a strong enough reason.?

Co-founder conflict is common, and every startup will go through it at some point. But have a resolution mechanism; otherwise, it'll drain your energy and kill momentum. Eventually, your startup dies because you ran out of money. The public sees this as the reason and not the conflict since we don't share internal problems with the external stakeholders.

Linked to the above, another reason startups drown is poor equity allocation. More often than not, this reason kills startups when things are going great! Some personal guidelines;?

• The ideal number of Co-founders - three (four max)
• Include an ESOP - you'll need to hire people better than you
• Vesting - EVERYONE should be on a vesting schedule

Q: What is harder to build, Product or Team? And why??

Hiring talent and retaining them is tough. Founders believe that they could onboard interns and juniors to build a revolutionary, disruptive product. The truth is that you will not have the time to groom or monitor their work. Furthermore, training and coaching is a skill. Just because you're good as a developer doesn't mean you'll be good as a trainer.?

Early in your career, you're renting your time. As you mature and gain experience, you're renting your judgment. Your hourly rate increases over time for this reason. So when you hire inexperienced staff, you need to spoonfeed. Obviously, some are outliers and will perform above the average. So the question you need to ask yourself is how good is YOUR judgment in spotting these gems.?The final piece in hiring is energy and culture. The most amount of your energy will go into convincing. Including yourself, parents, spouse, partners, customers, investors etc. If the core team is also part of this, you'll find it hard to sustain. The core team needs to feel that they're part of something big, and it's not just another job to advance their career.?

They should have the freedom as well as the confidence to challenge others. It's not only about executing tasks and crossing milestones. The most common mistake is to overemphasise the product. Hence, everyone should understand how the product is going to change lives. The first 10-20 hires aren't simple employees; they're not there to build your dream.?

Building a management team and attracting talent is part art, part skill. You can't teach or learn it by watching YT videos. Many believe that when you raise capital, you'll be able to hire talent. You'll only burn through your runway and have very little to show at the end of the round. Convincing talent to believe in your vision is the hardest. If you can do that well, raising funds becomes a lot easier.?

Polls have become my go-to feature to quickly test market sentiments. While results show an equal emphasis, 'who' selected each poll option tells the story. Those who selected 'Run out of funding' were mainly first-time founders. Those who voted 'Drama within the team' were mature, seasoned founders.?

First-time founders are obsessed with fundraising and PR. Second-time founders are obsessed with the team and distribution.?