Thursday, December 24, 2015

Startups' biggest mistake - Avoid it. Please.

Startups’ biggest mistake

There are many mistakes that can and are made in the challenging pursuit of building a great company.

Here is a list – not exhaustive of course. I’d love to see yours
-       Choosing the wrong co-founder?
-       Marketing before product has been validated?
-       Choosing the wrong technology stack?
-       Addressing a market which is far too small to build a substantial business?
-       Incorrect pricing model?
-       Deferring monetisation for too long?
-       Monetising too soon?
-       Appointing the wrong CTO?
-       Not appointing a CTO?

All these are significant potential pitfalls, certainly. But none is irreversible – provided you have raised enough money.

Without question the most common mistake we’ve observed in funding well over 100 startups is not raising sufficient capital.

About 20 years ago, my wife and I were fortunate to have the opportunity of building our own award winning home. It was an ambitious project and we were determined to create something exceptional. A good friend of ours, a property developer with years of experience came around to see how we were getting on – about half way into the life of the project.
His summary, after walking around, nodding sagely: “there’s nothing here that can’t be solved with time and money!”

Without money, you’ll run out of time – and if you take to long, you’ll run out of money.

Unfortunately the process of raising funds is neither enjoyable nor particularly instructive. There is a tendency of angel investors to want to invest as little as possible and to encourage reaching breakeven as early as possible.
Neither of these is a good way to go for an ambitious founding team.

I’m not recommending a high spending approach – on the contrary achieving a lot with very little is one of the clear indicators of future success.
But the Series A crunch is a very real phenomenon and even in the hottest markets, will always be a feature of the funding landscape.

Ideally the Seed round should aim to fund the business to a brilliant Series A – ie one with a top tier investor, a Series A that takes weeks – rather than months – to raise. The speed and ease of the raise is directly related to how much progress the business has made and how well prepared you are for the process.

So, how much should be raised at Seed? The answer is: enough to ensure that the necessary Series A milestones can be reached – comfortably.
Allowance should be made for the ‘speed bumps’, the ‘pitfalls’, the ‘pivots’ etc.
And never assume revenues in these calculations – unless they are 100% assured. Even then, the ability to focus entirely on building a product that will delight customers without distractions is very liberating.

We’d generally say that 18-24 months of runway is what is needed. Expecting – or hoping – to dash for a Series A, after 6 or 9 months , will often result in a frustratingly long, painful A round process. This is typically followed by difficult conversations with inside investors to lengthen the runway, raise a bridge or similar.

Eighteen months goes by pretty quickly and there is so much to do. The last thing you want is to be spending hours with potential investors on raising money – what a waste of time that is! I’d rather spend hours recruiting the best team – any day.

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