What are some big mistakes that startups make after receiving money from an investor?
So you spent the last 6 or so months completing your fundraising exercise. You exhausted your full network reach and then some, but hit your target and closed the round. First of all, bravo! Learn to celebrate your wins.
You will quickly become aware that your journey has now just begun:
Remember, you don’t raise money to build your product, but to finish it. You don’t raise money to find your market, but to own it. You don’t raise money to develop your sales process, but to repeat it over and over again — joeprocopio.com
Contrary to what the media and social networks make it seem, startup life is brutal and as a founder you will quickly face the reality that you need to overcome obstacles that you have never faced before. If you are a technical engineer, you need to engage in sales talks, if you are a business person you need to address and pay real attention to the needs of your team, if you are the visionary you need to cut the bullshit and roll up your sleeves.
For those who focus on the risks, the odds are stacked against you! There is every reason to fail. For those of you with the entrepreneurial bug, Let’s get it on! It’s terrifying and to steal a quote from my wonderful cousin (now the subject of a movie), Do it Scared!
I share hereunder some lessons learned from my experiences dealing with the growth ailings of the startup I was part of, as well as others learned from the portfolio of the startups invested in by the investor community. Of course there are a ton more and kindly do feel free to share yours in the comments.
Lose focus and pressure:
In hindsight, the best part of being in a thinly funded startup was how sharp we had to be about every decision we made. After funding, startups tend to experiment more freely and rely more on external resources than core lean methodology feedback cycles or throw cash at the problem, which is never a sustainable practice.
They stop connecting with people:
Despite its unpleasant reputation, most people understand that networking is important, even vital. Connections are the steady undercurrent that powers the world, supercharging the careers of the founders, operators and investors who excel at cultivating them. Be it for a recruitment drive, for product placements or marketing distribution channels, keeping your public persona game face on is a necessity. The manner to approach this is to genuinely keep finding ways you can be helpful to the people you want to build meaningful relationships with and be interested in their lives. DON’T reach out only when you need something.
This is going to happen and great startups have cultures that seemingly automatically reject bad culture fits. Ensure that communication is clear and transparent during the hiring process so eliminating bad fit should come as less of a surprise.
Not using funds for growth:
Stay hungry, and act like the bank account is still really slim. Because success will probably take twice as long and cost twice as much as initially expected, take care to treat the spend rate as if you are still working off your own money.
Fundraising is not about buying time for the startup but it should be to accelerate growth and capture the market opportunity. Inexperienced founders hesitate and want to be “sure” about their next move and end up wasting the funds in working capital thus adding no value and achieving no milestones. Maximize the spending of capital to create new assets that earn future value and ensure you are not just buying time.
Customer success metrics:
There exists a strong likelihood that your early stage metrics helped you close the investment round, but your unit economics are still off. You are not scaling at the expected rates and you need to revisit the business model. Your customers, more specifically early adopters and power users could be a well of information for you. Remain customer centric and ensure that helping them reach their goals remains a top measure for your business, doing this may disclose competitive advantages you had not yet considered or put to test.
My favorite topic — bad governance:
Maybe it’s my classical corporate finance education, but it surprises me how little discussion there is about sound corporate governance in startups. Maybe it is simply because it isn't sexy or because having a great product-market fit and culture eclipses the benefit of a sound board BUT I have seen many funded startups fail because of undeserved board actions.
- dictatorial founders who want it all their own way and refuse to listen to the investors who funded them
- in-fighting between the founders that block all actions that could be taken by the startup
- allowing founders to overpay themselves without any audit from the board
- too much focus on NOW issues without strategic direction
- inappropriate use of cash, think excessive branded stationary, pricey offices
- inexperience in negotiations with investors, licensing agreements or key suppliers-clients that jeopardize future growth or exit possibilities
Why the team is the most important
There are a number of ‘characters’ which play a critical role in a startup. It is likely that a team will not cover all the required bases, and certainly, founders will play multiple character roles. These are:
- Visionary, Purist
- Team cheerleader
- Executor, Get Stuff Done!
- Growth specialist
- Sales superstar
- Product owner
- Industry guru
- The numbers man
It is unlikely that your founding team can cover all areas, so it becomes critical to surround yourself with people who can. This does not only mean making great hires but also at the board and advisor level (www.clutchplayadvisors.com :D). Being able to attract talent is a well-regarded symptom of future success as it means that experts are selecting to devote time and resources to your startup as opposed to other opportunities they may have going for them at the time. Remember, you do not only have direct competition to contend with, but critically any matter that detracts from the attention of your target audience. If strong influencers and thought leaders in your space are part of your team, that will resonate well, long and far.
On Execution and Market risk
Keeping to a simplistic analysis, most companies as they launch are faced with essentially two major areas of risk, these being market risk and execution risk. Market risk is when the product being developed is being done so for a market that is yet to mature and the classic dangers are that the market is too niche, or the technology is too early for its audience. We classically refer to product-market fit when discussing these matters. I recommend you read through this article about the Superhuman case study on how to find ways to measure this.
Execution risk details the know how and connections required to get to market with a business model that is within a market that is now mature or clearly in a state of growth. The battleground is about who can do it better, faster and cheaper with clear differentiating factors.
It is key that you understand which game you are playing
When you are a first time founder, or either way you don´t have access to a wealth of experience, technical know-how and connections to help pull you through, you are better off in a field where market risk is at play. Mainly because in an under-developed market, the playing field levels out. Sometimes being the naive new kid on the block works to your advantage. This is because you will rely on particularities, like your personal affinity with niche cultural aspects to your advantage, think nascent markets like e-sports and circular economy to name the more popular ones. Founders who are truly ingrained in these communities have a sense of what makes these markets tick, so if you time it right your affinity with the culture grants you a natural advantage that is in itself a barrier around your business.
Of course, execution risk remains to exist even in a new market, but the novelty and innovation may pull you through. Whereas is in a more mature market space it is all about execution, and usually top talent seems to cluster together in order to leverage their resources, thus closing the gap and consolidate the opportunity quickly.
The mistake founders make is that they do not embrace the quirkiness of their culture to their advantage in favor of more classical execution based tactics. For more on this topic, read about the success stories of Twitch and the more classic example AirBnB.
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