Do you dream of beating the odds and ensuring your startup is a success?
When you start a business, you want to succeed, but you know that most businesses fail. Generally, it’s not one giant mistake that kills a startup. Most startups fail for multiple reasons. Unsuccessful entrepreneurs will tell you they failed because…they ran out of money, or their marketing strategy was weak.
Startups are like airplanes; they crash because of multiple errors, not just one.
Here are some of the most common startup errors and how you can avoid them:
Too few or too many founders
Compare the number of founders to the amount of salt in your food. There is such a thing as too much salt, and it’s possible your startup can have too many founders. I know it may be comforting to have five, but will it really help you succeed?
One founder is not ideal unless you are ready to make a herculean effort. Two is best, as we learned from Jobs and Wozniak, Larry and Sergey and Yang and Filo. Anything over three is almost always too many. It’s true you could have four, five or even more, but you’ll end up pulling your hair out trying to make collective decisions.
Two and three are your magic numbers. That gives you just enough team to lean on when things get tough.
Your co-founders will enable you to:
- Cry on each other’s shoulders (Let’s hope this rarely happens, especially in public.)
- Ease the load – Getting a startup off the ground is hard to do alone.
- Complement each other’s skill set – makes your team that much stronger.
- Take a vacation – Unless you are made of two-by-fours, you will need to take time off.
Failing to partner with the ideal founder
Teaming up with the wrong partners can be just as damaging as beginning with the wrong number of founders.
If you are yin, your ideal partner is yang.
Let me explain.
Let’s say you are an awesome coder. Your ideal business partner is not going to be someone with the same exact same skill set. You are looking for a skill set that complements yours.
If you really want to increase your chances for success, partner with an entrepreneur that had already built a successful business in the past.
Look for a co-founder with the skills you lack. As a startup founder you must know what skills it takes to succeed, and if you and your co-founders cover most or all of the skills required, you will most likely succeed.
The Steve Jobs and Steve Wozniak partnership is a perfect example of a super effective alliance. As long as Wozniak could build it, Jobs could sell it.
Does this mean that two techies can’t start a super successful business? Of course not. Larry Page and Sergey Brin had similar technology backgrounds, and they started Google.
Working with your co-founder, contrary to clichés you hear, is not like getting married. It does, however, help if you are friends, but you don’t have to be best friends. Some of the most successful co-founders grew up together, went to school together or worked together. It helps to have a shared history and interest.
For your partnership to work, you must be able to:
- Serve as a sounding board for each other.
- Share the mission and vision of your startup.
- Commit equally in terms of time and effort to the business.
- Agree on an exit strategy.
Ahead of our time
A common excuse for failing startups is bad timing. A worse excuse is “We were ahead of our time.” Please…
If you ever create a product without a market need, you have committed one of the greatest business sins.
You ignored the customer.
Startups that know what they are doing would never create something ahead of its’ time. I am sorry, but it is simply not possible. Only startups that ignore customers would ever create something people don’t want.
There are several ways you can test your ideas:
- Run test advertisements – Are people responding? What kind of conversions are you getting?
- Pre-sell – This is one of the scariest things to failed startups. You can’t argue with paying customers. Even if you don’t have a product, you should be able to pre-sell to validate your idea.
- Check competition – If there is no competition, there is a good chance there is no market. Competition is your friend. You can study it and learn from it. Then ultimately, beat it.
Creating without the customer
Startups that fail love to operate in a vacuum. They think that they know what the customer wants, so they only focus on their love for building stuff.
The customer only gets in their way, and they will do anything to avoid interacting with them.
If you are going to succeed, you won’t build anything without your customers.
Paul Graham of Y Combinator once told Airbnb founder, Brian Chesky, “Your users are meeting in person, and you are here in Mountain View. What are you still doing here?” To clarify, Graham said, “Go to your users!” After that, Airbnb basically went door-to-door signing people up for their website. Meeting their customers in person changed the trajectory of their business. What they learned empowered Airbnb to become a profitable business.
Before you start quoting Steve Jobs, “it’s not the customer’s job to know what he wants,” keep in mind that he never said the “customer doesn’t know what he wants.”
It is true that customers don’t really “know” what they want. Only God does. Customers can describe their challenges and difficulties. They can share their experience with competing products or alternative less-than-perfect solutions to their difficulties. These things can help you determine what it is they actually want.
Your startup will benefit in multiple ways when you involve your customer:
- You will stop hiding behind your ideas, your keyboard, and your ego.
- You have to identify who is your customer. I know this is obvious, but many startups ignore this.
- Your customers don’t want to be told; they want to be involved. If you don’t involve the customer, your competitors will.
- Even disruptive products are better developed with customers. If your product doesn’t yet exist, develop it with them. The customer might not be able to tell you what he wants, but he will let you know that you are moving in the right direction.
- You can use what you learn while maintaining a critical distance from the feedback.
- You will be able to observe how your customers interact with your product.
- You can observe them experience difficulty, decode where the problems originate and then fix the problems.
The biggest mistake your startup can make is to ask your customer what to build. That kind of thinking shows that you have no idea why and how to get your customer involved in the developmental process.
Another huge mistake is trying to explain to your customers what your product is. Getting your customers to agree with you is a recipe for disaster.
You know that you have succeeded if you can develop a product that delights your customers. Even though you have developed it with your customers, you have managed to surprise them. With their help, you have built something they could not have ever imagined.
Lack of systems
Great companies are born twice. The first time through the mind of the entrepreneur and secondly through systems.
If you want a startup that scales, you must create systems. Systems will enable your business to run without you.
Systems are rules, policies, and procedures that enable team members to work productively without having to reinvent the wheel on a daily basis.
Here are the primary reasons your startup must have systems in place:
- Systems will result in higher productivity because team members know exactly how to complete tasks.
- Systems will empower your team with less training to function.
- You will spend less time managing your people.
- It will be easier to train new staff.
- The number of errors will be reduced.
- Systems create a culture where doing tasks the correct way is documented and followed.
There are many different business systems, but the most important ones for startups are:
- Marketing/Lead Generation System – It is your tactical guide that covers your lead funnel and marketing channels.
- Sales System – It is your guide to convert leads and prospects into customers.
- Fulfillment System – It describes the steps your team takes to deliver your product or service to your customers.
- Customer Service System – It is your guide to the steps it takes to create the best possible customer experience. If a customer does A, we respond by doing B.
Systems are not about vision or long-term strategy. We are talking about actionable items or actual steps one takes to get from point A to point B. Systems are the manual to successfully completing certain tasks. It requires little or no critical thinking and is more about execution than invention.
Hiring the wrong people
The simple fact is that nothing will kill your startup faster than hiring the wrong people. This is especially true for your first few employees.
Your challenge as a startup founder is to find people who are willing to work long hours for less-than-market rates. It’s a pretty tall order. If you can compare hiring for your startup as you would for a nonprofit organization, you are on the right track. People work for nonprofits because they believe in a cause. Your job is to find the few qualified candidates that believe in yours.
Successful founders are slow to hire and lighting fast to fire. Anyone can make an error and hire the wrong person.
The longer you allow the poor performer on your team, the greater the damage he will cause.
The person you are hiring for the job has to have the hard skills required for the position.
Also, consider the following:
- Does the person fit into your culture? Even if there are only a few people in your startup, there is a culture, and you must make sure the new hire will gel well with your team.
- Will this person fit in with the way we work as a team? You might hire a great programmer, but if he is impossible to get along with, all the hard skills in the world will not be enough for great results.
- Is this person excited about working for a startup or scared by it? A startup environment is not for everyone. The right hire must feel comfortable working in a fast-paced startup environment.
Perhaps the single most important thing to remember here is never rush into hiring.
Even if you are desperate for help, take your time to qualify the candidate.
The following are some candidate assessment tools that you might want to try:
Too much emphasis on raising money
Let me get this out of the way fast.
Do most startups need funding?
Before you fall in love with the idea of raising money, consider the following:
- Less than 1% of startups ever get VC funding, and most of these startups fail.
- Raising money is extremely time-consuming. Think of it as a full-time job on top of building your business. Is it really worth your time and attention?
- Most successful startups are self-funded.
Startups that fail tend to have too much emphasis on raising money. It is possible to start out by bootstrapping without hurting your growth trajectory.
It can be hard to resist, when every day you hear about multi-million dollar fundings, especially when you have no idea how long founders have been chasing investors.
The costs involved with getting a startup off the ground have decreased so dramatically that it often makes sense to postpone the whole funding circus.
37 Signals is a great example of building a bootstrapped business. Lack of money helps you focus on making money above all else.
It is also true that bootstrapping will only get you so far, but too much focus on raising capital can take away your focus from what really matters in your startup.
Run out of money
Like it or not, running out of money is a fear that funded startups live with.
You will run out of money for two reasons, maybe three:
- You raise too much – Too much money will hide problems, and it will force you to “do big things” you are not yet ready for.
- You raise too little – If you don’t have enough money to reach your next milestone, you did not raise enough money. Not raising enough money is like driving in the desert and not having enough gas to reach the next gas station. It’s frustrating, and it happens all the time.
- You spend like there is no tomorrow, and we all know that there is always a tomorrow. – You are in this category if you drink the “fail fast” Kool-Aid.
The best way to avoid running out of money is to avoid funding, but if you must be funded, it is a fear you are going to have to live with.
Taking investment from the wrong people
With hundreds of VCs and tens of thousands of angel investors, finding the right investors isn’t always straight forward.
Don’t cold call investors. Do your homework. Investors want to know that you care and are not just another desperate startup. It is much more effective if you get connected through a referral.
Remember it’s not just about the money. All investors give you money, but there are only a few that will give you real valuable help. What you are looking for is investors that add more than greenbacks.
Here are a few key factors to look for to find the right investor for your startup:
- References – Check the investment history of your investor. Reach out to other funded entrepreneurs to get a feel for working with the investor. Learn about the level of commitment the investor brings to the table.
- Expertise – Does the investor have experience with startups in your space? Learn about the investor before you sign on the dotted line. An investor in your space will not only be more helpful to you but will also be much more likely to invest.
- Dictator or partner? – The right investor is a partner, not a bully. As Richard Branson explains, “bear in mind that a dictatorial financial partner can dim the spirit and enthusiasm of a new enterprise, muffling the spark that prompted you to launch this project — the spark that is most likely to make your venture different from your competitors.” You are looking for support and an investor who is comfortable taking the backseat while your team runs the business.
- Clarity – Ambiguity will cause trouble in your relationship. It is your job to set clear expectations up front.
- Value beyond dollars – Will your investor add value beyond money? You are looking for someone who helps you grow as opposed to a transactional relationship. For example, investors should be able to help you develop key strategic partnerships through their networks.
- Term sheets – Ask for exit clauses to be clearly identified. Ask experienced entrepreneurs and attorneys to help validate.
- Love or infatuation? – You want an investor that really loves your company and will do anything to help you succeed. Will they run at first sight of blood or will they be there to fight with you through all your battles?
Inability to develop strategic partnerships
You could always raise more money to fuel more growth. You might go that route if you don’t mind giving away more of your equity. But what if you could accelerate growth without giving away more of your business?
Some of the most successful startups have been great at building strategic partnerships.
Growing your startup through strategic partnerships is a key differentiating strategy.
The right strategic partnerships can be a huge help for startups in terms of capital conservation and speed to market.
As Ralph Waldo Emerson wrote “hitch your wagon to a star.”
Here are some of the key components to building effective strategic partnerships:
- Establish clear objectives at the beginning. Ambiguity will most likely result in a failed partnership. Clear objectives help you create benchmarks for measuring a project’s success.
- Avoid making agreements that require exclusivity. Exclusivity is going to hurt your efforts to scale.
- Your ideal partner will be larger and more successful than you. Look for partners with large market penetration.
- Protect yourself, preferably with patents.
- Speak with the customers of your potential partner. You can find out a lot just by speaking with the customers of your potential strategic partner.
- Keep communicating with your partner. Maintain contact through frequent check-ins. Most problems can be solved through effective communication.
- Insist on an easy “out clause” in case things don’t work out.
Wanting to scale too fast
Starting your business is the hardest part, but scaling it is the most difficult.
Every startup wants to make it really big, but scaling too soon can crash your business.
Successful early-stage startups work on things that don’t scale. The few startups that succeed are great at starting out by serving a few customers and serving them well. Only when you are running like a well-oiled machine with a few customers can you start thinking about scaling.
If you scale an imperfect system too soon, you only amplify your problems and destroy your business. For example, if you are spending too much on customer acquisition for your first 100 customers, trying to get 100 more customers the same way will put you out of business.
Consider the following before you scale your business:
- Timing – Even startups have stages. During the very first stage when you are figuring everything out scaling is a deadly sin. Your startup had to reach its’ second stage before you should even think about scaling.
“If you don’t know what you are doing, stay small.”
- Stop dreaming – Scaling is not about dreaming big. When you have ten customers, think about how you will get your next ten customers. There’s no use in thinking about building a billion dollar business at this point.
- Can you afford it? – There are two common ways to finance growth. The easy one is to get additional funding. Easy is not necessarily better. The other option is to build your business to be profitable. Unfortunately, being profitable is not always possible.
- Create systems – Your internal systems will make or break your scaling efforts. You must have your marketing, sales and customer service systems in place.
- Focusing on growth vs. profit – I know that this is going to be unpopular, but you should always focus on profit. (Note – I am talking about revenue too not just profitability.)
It is true that there are quotable examples of startups, like Facebook and Twitter that exploded without profit. I agree that it’s impressive to see pre-revenue companies with millions of users, but the reality is that most startups without profit fail.
Running a profitable business will resolve most of your problems for several reasons:
- Capitalism works. You create something that people are willing to pay for, and you have a business. Users are great, but they don’t pay your bills.
- A healthy business is a profitable business. Profit is also important to maintain long-term stability.
- Contrary to popular belief investors prefer profitable companies.
- It requires smarter entrepreneurs to build a profitable company than increasing the number of users with additional funding. When you are building a profitable startup, you are building a better business.
Comparing yourself to others
Startup founders who resist the urge to compare themselves to other businesses are doing themselves a great favor. They also make better decisions.
It is true that (to a certain degree) we all compare ourselves to others. Think of comparing yourself to other businesses like looking at candy at the grocery store; it’s OK to look as long as you don’t buy into it.
Comparing your startup to others is foolish for several reasons:
- Growth rate – Many people lie about this number. If you believe it, you are simply fooling yourself.
- Money raised – You don’t know how long someone has been working on getting funding. If you would have to sacrifice the same number or hours and give up the same amount of equity, you might not want the funding anyway. And by the way, people lie about their terms and details anyway.
- Shouldn’t affect you – If you make decisions based on what you hear about other startups, you will make the wrong decisions.
- Won’t help you – No matter how successful or unsuccessful others are it won’t help you.
Thinking too much of your location
The majority of tech start-ups that have reached a $1 billion valuation have their roots outside of Silicon Valley.
The San Francisco Bay area is the undisputed capital of the tech startup world. Does this mean that you have to pack your bags and buy your plane ticket?
Before you do, consider this:
- Herd – If you want to be part of the herd, go to the Valley. The failure rate is just as high there as it is elsewhere.
- Talent – Talent is everywhere. Setting up shop next to the Googles and Facebooks of the world means that you are competing with them for talent. They will outspend you every time.
- Cost – Cost of living is among the highest in the US.
- Expenses – Everything from real estate to employees, to state regulations make California a tough place to do business.
- Options – There are startup hubs in every major metro area in the US.
- Cloud – The cloud has diminished the importance of location.
60% of major tech companies were created outside of the San Francisco Bay area.
We all have an idea of what it takes to build a successful business. Arrogance shouldn’t be one of them. Of course, it doesn’t mean that arrogant entrepreneurs fail. We see plenty of them succeed. For example, Mark Zuckerberg ousted his friend Eduardo Saverin from Facebook and called his users “dumb fu#$s.” However, this behavior is not recommended and could lead to disaster.
There are many reasons it doesn’t pay to be a jerk:
- When you treat people like garbage, they’ll go out of their way to hurt you. It is hard enough to succeed as it is. Make as few enemies as possible.
- Successful investors like Paul Graham of Y Combinator live by a “no a–hole” rule.
- People, in general, prefer to be around pleasant people and avoid jerks, which includes employees and partners.
- It is possible to build a multi-billion dollar startup without being a jerk.
Realistically, most founders are not arrogant, although sometimes their confidence might come across as arrogance.
Failing to get mentors
Like most other things in life, it takes a team to succeed as a startup. If one thing defines the startup journey, it is dealing with the unknown. For this reason, having a mentor is invaluable.
As Richard Branson said “It’s always good to have a helping hand at the start. I wouldn’t have got anywhere in the airline industry without the mentorship of Sir Freddie Laker – founder of Laker Airways”.
Find a mentor.
Look for the following characteristics in your mentors:
- Expertise – When you look for a mentor, seek out expertise instead of big names and titles. When you start out, almost anyone will know more than you, so you don’t need to get a Fortune 500 company CEO to mentor you. What you are looking for is someone that has experience in your space. The person might be an industry veteran or a fellow entrepreneur.
- Success – The ideal mentor had success as an entrepreneur. It is a lot easier to follow someone’s advice who has actually succeeded.
- Tough – Don’t expect your mentors to be your friend instantly. They are not there to offer a shoulder to cry on. You want your mentor to hold you accountable. You seek out their advice, and in return, they will offer you actionable advice. It is then up to you to take action or ignore their advice.
- Honesty – Your friends will tell you what you want to hear, but your mentor will tell you what you need to hear. A good mentor understands that it is better to be brutally honest than allowing you to make a decision that you will regret.
- Free – Mentors usually don’t charge for their services. Many entrepreneurs want to give back and if they have the time they might become your mentor.
Mesmerized by vanity metrics
Vanity metrics is the drug of choice of the foolish startup entrepreneur.
Some of the more common startup vanity metrics are:
- Facebook likes Twitter followers and the like.
- Dollar amount received in funding.
- Advertising spent.
- The total number of unique visitors.
- Business location.
- The total number of employees or team members.
It feels great to list your vanity metrics. The problem is that none of them will help you make better business decisions.
Actionable and measurable metrics will help you succeed. They are the only metrics you should care about.
Examples of measurable metrics are:
- The number of leads generated in the last 30 days from Facebook ads.
- The most recent 100 leads resulted in a 5% sales conversion, which resulted in $175,000 in sales.
- Total sales, profits, and costs.
- The cost of customer acquisition.
- Churn rate.
Quitting seems easier than succeeding
There are times when quitting makes sense, but often it is the easy way out.
Most of the time you have two alternatives to quitting.
1. Pivoting – The ability to pivot as needed is a core component of entrepreneurship. You pivot when you fail to meet your goals. If your goal is to grow 10% month over month, you either change your goal or change the way you do things. If people, including employees and team members, no longer believe that you are on the right track, it might be a good time to pivot.
Here are some examples of companies that successfully pivoted:
- YouTube – Tune In Hook Up, a video dating site.
- Twitter – Odeo, a podcasting platform.
- Flickr – Started as an MMORPG (massively multiplayer online role-playing game) called Gamrole-playing from Canadian firm Ludicorp.
- Pixar – Animation tools.
- PayPal – Designed to “beam” sums of money between PDAs (Does anyone still use PDAs?)
- HP – In 1947 it started out as an engineering company.
- Nintendo – Started out as a playing card manufacturer in late 18th century Kyoto.
2. Sticking – It sounds easy to stick to your plan and march on, but it is perhaps one of the toughest things to do in business. Sometimes you’re just out of ideas, and the best course of action is to stick with what you have been doing.
Whoever said that you should never give up was either an idiot or never tried anything difficult.
Unfortunately, there are times when neither pivoting nor sticking is an option and the best course of action is quitting. There is such a thing as wasting your time on a startup that ran its course.
There are many legitimate reasons to quit and here are some of the most common ones:
- Burnout – Are you still passionate about your startup? Do you still care about what you have started? Do you want to do this for another – fill in the blank – year(s)? Burnout plagues the successful too. You can be perfectly burned out building a successful startup.
- Your product sucks – Hey, it happens. The problem may still exist, except your solution is not what the market wants. Your traction is stagnant. The number of users is not growing. Revenue is flat; there is zero growth. You can’t raise more money. It is not a pretty picture.
- Your marketing sucks – I am not sure which is worse: a bad product or the inability to sell a good product. The bottom line is the result is the same. Your startup fails.