Oct 12, 2010

30 Mistakes that Startups Should Avoid

The adage, “an ounce of prevention…” applies to startup teams, especially first-time ones. They can make mistakes that forever weaken or even kill their ability to succeed. Most mistakes made at the formation of the founding team can be corrected, but those affecting voting rights, equity distribution and ownership rights, can become fatal. Two additional groups of mistakes can also be ‘permanent disabilities’ or ‘mortal wounds’: dealing with investors and operating the company. The VLAB and its sponsor, SNR Denton, presented a panel discussion among a venture capitalist (VC), two well-experienced startup entrepreneurs, and an attorney to discuss 30 mistakes and give advice on ways to avoid them.

A list of 30 mistakes that startups should avoid comprised a handout for the audience. The two VCs on the panel concentrated on mistakes to avoid in forming the startup team and in ways of working with investors. The experienced entrepreneur mostly talked about operations. The attorney focused on mistakes in team formation and in working with investors.

A few counter-intuitive points, especially for first-time startup teams, and my succinct advice:
  • “Recruit friends and family for the founding team” might be the worst decision for the startup. A startup’s seed funds often come from “FFF”, friends, family and fools. They took the biggest risk and had the most faith in the startup. The emotional relationship aside, the entrepreneur literally owes them. They are already ‘on your side,’ are highly motivated, and you already know them so they are easy to recruit. But they may not be the most knowledgeable and experienced people for your business. The relationship that pre-dates the startup may bias any merit-based compensation model.
  • "Money from any source is equally good” is not true. This is where your own attorney who knows the vast and ever-changing array of business terms, and is experienced in negotiating funding terms can save you from being ‘diluted out’ of equity through successive rounds of funding. By the way, one of the mistakes is to take venture money too early and venture funding is the most expensive money that you can accept.
  • “Anticipate the market by introducing the most capable, high featured product with the most disruptive technology as possible” can be fatal. It does seem contradictory that VCs greatly value ‘disruptive technology’ yet discount valuation if you still have R&D to do. The sweet spot is to have products or services whose technology is already proven and paid for, preferably by somebody else, and the market has already been primed by somebody else.
  • “We will hire a fancy attorney when we get bigger” can mean that attorney-come-lately must repair or ameliorate the damage from mistakes you’ve already made. There is truth in the adage: “An ounce of prevention is worth a pound of cure.”
The free-flowing, 90-minute discussion touched on many useful morsels such as how to connect with VCs and angels. Dave McClure said ‘you must have had 3 previous interactions with me before I will consider talking to you about your startup.’ Most of the advice was to know the mistakes and avoid them and to exercise good business sense.