While books like Lean Startup, books by Guy Kawasaki, and a good 25 top tech startup books are available on Amazon, I am still quite often finding specific Startup Disasters. Often I run into a startup that tells me in our first consulting “intro” meeting they have spent $100,000, $300,000 even $500,000+ and need help!
And why do they need help? Because they know they pretty much need to rethink what they are doing because they don’t know where they are heading and sometimes why they even got into this in the first place! They realize that they have just about spent either every last dime they personally have going into this venture or every last dime of their investor's capital or every last dime of the bank loan they received. Or possibly they are wealthy enough to continue and sustain the spending. Either way, it has startup fever written all over it. Yes, that is a real syndrome I think! Let’s blame Facebook, Twitter, Whatsapp and others for that.
Ok, so they need help. But when I do an assessment and look over those dollars and find out that it has all been spent and they don’t have an MVP, less a working business model, I wonder “wow” what the blank is going on here! I wish I could tell you this story is not a repeat one. But it happens over and over.
So, let’s make up some rules for startups to avoid this particular disaster before they get started.
Rule 1. Spend Virtually Nothing On Serious Technology Initially
Sounds counter-intuitive, but quite frankly spending money building technology at the beginning is the biggest mistake tech startups make. Unless they personally have been through the startup cycle a few times and have the experience, they typically don’t even know what product, service, or features they would need to build. 99% of the time, they will build a product nobody needs or it will never get past 80% complete.
Rule 2. Before Tech Comes Marketing
This is very hard for techies to understand, because we (I am one), want to just start building and plowing through code… Well, that can lead to a pile of code without a market, without a plan and may require starting over from scratch. So, if marketing, selling, thinking about the customer and what they need is not in your bad of tricks, then assign it to your partner. And when I say techie, I am not always referring to a technical person. You can be a marketing guru who is extremely detail-oriented and rigid about the product and market fit. These can be more of a personality type issue than anything. Many marketers lock into an idea and just start building! Just think before you build something from scratch!
Rule 3. Before Marketing Comes Projections
So, you have figured out the market. You have figured out that pain point. You think you have the next Waze, Engie, Whatsapp, or Twitter. And you are ready to go! Well, before you go forward, you need to back up. Most businesses still need to make some revenue or have the possibility of making revenue. You need to get out a spreadsheet and determine if this is financially viable! Doing a financial spreadsheet should be closer to Day 1 and not Day 554.
Rule 4. Just Because You Love This Idea, Everybody Else Will!
This simply means you can’t build a business on the premise that you like it and want it and that means the world will want it. You think you know what the world wants, but you will only be a certain % right. What is that percentage? You could even be in the less than 5% level of user acceptance and basically nobody wants the damn thing at any price. How would you know this? Well, the only real answer is to either put up a simple web page, do a small test and find out from people (preferably lots) or put an MVP out there and find out. Always challenge your own ideas and “sanity”. But even “testing” through focus groups, talking with friends, and doing SurveyMonkey may only give you a fraction of the sample you need to test the market. It is not enough of a test! You need to have some faith and personal belief, but find out early if it is a dud! So you really never know.
Rule 5. Never Sell With Your Own Wallet
Just because you would never pay more than $5 for an eBook, does not mean others will not pay more. Never set pricing based on what YOU personally will pay. The market and what they will potentially pay is often higher than you think. Once again, don’t rely on intuition for pricing but rather science! Don’t lock-in and think you know the answer to this and other questions. The market has price elasticity, where the same number of products could be sold at $5, $10, $15, $25. Wouldn’t you rather be selling at $25?
Rule 6. Open Your Mind Up Early To Pivoting
You may think you are in the website hosting business, but you may really be better off as a marketing company! You may think you are building an eCommerce site, but you really are a membership system. You need to look around at the world and be able to easily slide into something that is more lucrative, faster-growing, and gets you to revenue. Too often startups lock-in and ride their train to failure without stopping and deciding to switch before it’s too late. Don’t make commitments to your ideas, make commitments to succeeding.
Rule 7. Try To Avoid The Tech Svengali
The Tech Svengali is this guru which naive startups often run into, especially if the founders are not technical or have never built a tech startup before. The Tech Svengali doesn’t have to be technical but can definitely be ADD. They can be so over the top and passionate, that often susceptible startups give away control of the product to this incredibly overbearing person. It is this prototype personality that is a know it all, who has a problem personality, and sometimes a record of broken dreams you may not be aware of. So do your due diligence on them. Don’t rely on their brilliant minds while sitting with them at Starbucks. Call anybody, someone who has been through hell with them. They may seem bigger than life and throw a lot of buzz words around and make great cult leaders. But you don’t need a cult leader. They can have a temper and seem aloof. And they can appear like a god-send to first-time startup founders. Now, this may be the right guy or gal for your venture. Who knows, it could work (but often Nah)! The only way to find out is if you give them a few assignments and see some tangible results to make sure they are the real deal. You may feel you want a take-charge driven superior-tech mind on your team, but honestly, they can simply be a Hitler in a black t-shit. You don’t want to know how many tech ventures die because of conflicts and problem personalities where the lead tech guy turns out being a crazed Asperger anti-social personality. Best to have the rule of no assholes on the management team. And remember you are in charge of your startup, not this new guy.
Rule 8. Avoid The Captain Toms
The show Silicon Valley character Russ Hanneman is not just a made up TV character. If your venture shows some promise or you network around far enough you will run into another prototype personality. There are these people who always, I mean always show up when deals are getting interesting and seem to have all the answers and want and desire to take charge and provide the leadership you often don’t have. They are either money men, sales execs, brokers, dealers or marketing experts and gurus who claim they can come in and run the ship and take the flailing startup to shore. But quite often they are just great talkers who had some past startup experience that they throw around as their badge of honor. Beware. Having made money selling off a startup or having previous startup success is not always an indicator of intelligence or knowledge or that they will succeed again. And never equate wealth with smarts or brains. Luck is a bigger factor. You have to be your own guide. Either way, don’t ever let some other guy come in and take over your baby, unless they are writing a check! Even then, the check may not be worth it.
Rule 9. Never Give Away Non-Dilutable Shares
This could be the biggest financial rookie mistake you can ever make. Trust me I’ve done it and it sucks. It may only be 2% to 5% of the equity for non-dilutable shares. The guy or gal may be making you an offer either for capital, advising or a partnership. What may seem like a small percent of the company for non-dilutable shares, can instantly turn into a big problem when you get either the next round or the big offer. For instance let’s say you own 80% and you are offered $5 million in capital for 50% of the company. That may sound like a not so good deal, but it is quite a good deal and it does happen. The reason it is a good deal is they just made you worth $3 to $4 million on paper in valuation. Which is great! The problem is, at that point, if this other person has taken this non-dilutable position, their shares do not dilute with the new investment and they are extremely well-positioned to become THE deal-maker and can control your destiny and can actually end up with more shares than you. That’s because that small non-dilutable percentage actually explodes in value on a big investment and they can easily reach your value even though they started with little to no shares, but non-dilutable. So don’t do it! It not only f’d up my deal, it caused the principal in my deal to kick me to curb when I fought with the board on letting it happen. Walk away from a deal like this now!
Rule 10. ALWAYS Search For Early Revenue
Ignore all these other books and calls to just build good-will by getting traction and visits and users. Screw that. What’s always better is early revenue. It will pay your bills, get your first investors and make the venture work. You don’t know how many startups we have spoken with that never make a dime. If you can make revenue now, do it! You are in a startup to survive and revenue is one of those things that you need or get a rich daddy!
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