Working at startups is a rewarding experience. At least it was for me. You are working with a small group of people motivated to create something different. Something new. Something exciting that is going to change the way people live.
It feels like the old models of doing business are thrown out the window and you are free to discover a new path. Old protocols are done away with and offices become a place where you are excited to get to in the morning. Your boss is actually listening to what you have to say.
However, in order to achieve those goals, a company needs support in more than a few areas. It needs financial, moral and economic support. The funding is required in order to work and move forward without the stress of having to cover the bills at the end of the month. It needs moral support from those who have greater experience and can help guide a company through the rough patches. Most importantly it needs economic support in the way of a market. If nobody sees the value in what you are doing, they won’t purchase from you. You can yell and curse and scream at the market for being blind to what you are trying to present but it won’t change one thing. The world just doesn’t work like that.
As a company grows in size its character changes in many ways. The more employees you have the more organization is required. It is no longer that small dynamic group that you knew at the beginning.
It is great to have a dream and a target but in the end it is a business. It is there to create value for the economy and turn a profit for those who were bold enough to believe and risk their capital.
In today’s world this happens so fast. Companies come and go in a matter of months. Some continue, some morph into something new and many just turn the lights out when the money dries up.
Having the opportunity to ride one of these experiences right through to 4th round funding is invaluable. At the time I was aware of the changes in the economic environment around us and the trials and tribulations that fellow startups were experiencing on a daily basis. For this reason I paid attention and wrote notes. In addition, I had the benefit of hindsight after a few years to look back and identify what worked and what created difficulties. Here is my list of insights and observations:
1) No amount of financial support guarantees success
I worked for a few companies with financing of close to $20 million and one thing I learned was that when you have employees and expenses with no revenues, that money doesn’t last long. If the market perceives no value in a company’s product or service and the company is not able to convince it otherwise, no amount of funding will save this company from eventual demise.
2) Understand who your target market is
In one company, I remember the first couple of meetings we had with some major potential clients regarding our product. We were in the digital copyright management space and we were meeting with some large copyright management companies. We thought that what we had developed was going to launch these guys into the digital era. Then I remember the President of one of these companies saying, “you can’t launch that, this is our space and we have a government mandate, (Otherwise a monopoly).” This was the beginning of what became a very long and frustrating experience trying to convince our target clients that we were not trying to steal their business but wanted to work with them.
If we had spoken with these companies before we may have gathered a better understanding of how they were approaching the digital era before we invested heavily in what we thought they needed. Instead of creating partners we created adversaries and became, in their minds, disruptors.
3) 100-page business plans with pie in the sky financial projections are a waste of time.
I remember being proud of all the work that went into our business plan. It required a lot of time and effort of many. It was filled with impressive financial projections, colorful charts and tables. Unfortunately the plan had more to do with wowing the investors rather than really understanding what was happening in the market and where we were really positioned. Actually if we looked carefully we would have seen by our own research how we were poorly positioned.
This is not to say that business plans are not worthwhile. They force you into a thinking process that increases your understanding about the market and where best to position yourself among competitors. This is assuming you are being brutally honest with yourself, however, It doesn’t require a 100 page business plan to clearly outline the company’s product’s opportunities and strengths. It is a plan after all and in time plans need to be adjusted and changed to the rapidly changing business environment.
4) Investors who only give financial support will be more of a burden than anything else.
I was involved in many presentations to current and potential investors and what I found was that the ones who only had cash to offer became the biggest burdens to the company. They didn’t have much patience, often didn’t understand our technology and were more concerned with getting their return as quick as possible. For that reason, none of their questions were really concerned with how the company was building its reach but mostly with “how long will this take.”
I noticed that other successful startups around me were involved with investors that provided much more than just financial support. They used their connections to help management in any way they could to develop the business and expand into the market.
5) A board of directors that have nothing to offer will offer nothing
The same is true for the board of directors. The board should be very carefully chosen, as they are there to provide guidance and support to the management as it confronts many challenges. A lack of cohesion in a board can produce lots of friction and make matters worst, especially when it comes to disagreements between the founders and CEO.
I used to keep a journal and notes of all my experiences in these fast paced companies from growth to demise. Here is one of my entries:
“Investors are fighting between themselves, the board is not supporting the management in any way, and everyone is looking for their own way out.”
At that point who is willing to find a solution? You could see the writing on the wall.
6) All the marketing in the world will not create demand for a product or service where there is no demand (believing is not enough).
I used to hear it often, “you have to believe.” Positive thinking has its strengths and can put you in a more powerful state of mind but it won’t help produce a market that isn’t there. This is especially true in marketing. If your market has not been clearly researched to where there is strong evidence of potential demand for your product or service then no amount of marketing support will help that. I have seen this many times.
Here is a great list of recent startup casualties and their reasons for going out of business. There are lots of great insights.
7) Just because you get financing does not mean that you should be spending it foolishly
I remember walking into the office a few days after we received another tranche of $6 million in financing. There were boxes everywhere and new desks for everybody. I had no problem with the old desks. After all it was just a desk. When I asked the CEO what all the new furniture was all about he said “We got the money, so now we have to spend it.” I am not sure what his message was but I just remember thinking that if this was how the finances were being managed then this company was in real trouble. I later found myself in charge of liquidating those very desks!
8) It is not necessary to send people to conferences all over the world. Do the math in order to get the best ROI. (See our article on trade shows, The Biggest Winners at Trade Shows are the Organisers! )
In addition to the new furniture we were scheduled to be present at a large tradeshow in San Jose. Most of our team was based in Europe. The CEO wanted everybody present. The stand did not require the presence of so many participants. In addition, it wasn’t cheap to send everybody over on a long haul flight, put them up in a hotel and all the other expenses associated with it. Not even Microsoft had as many people as us at their stand.
9) If you can’t quantify what you are getting back from your marketing investments then you shouldn’t do them.
We had received a lot of money and suddenly the marketing budget went up considerably. We were spending large amounts on events, advertising, PR etc. We had the belief that we had to be there, we had to be visible but this is not enough. I can now see clearly how so many startups waste marketing dollars on useless events, advertising, and promotions etc. This is because they don’t quantify what they expect to get in return for the marketing efforts. Large companies like P&G are masters at this. They know exactly how much they are spending in comparison to how much those investments will generate in sales.
In today’s startup market though I don’t see the same excesses that I used to see. Companies are coming up with some very clever marketing strategies and tactics that require very small investments yet produce very impressive returns. Maybe they are getting wiser.
10) Developers usually think they are right and the customers are stupid.
The developers actually building the products often have a vision of what is cool and useful to them, in comparison to what the customer needs. When these disagreements show up the developers often push back. The big problem is that if the target market is not another developer, they may not see things the same way.
I found by visiting a client and taking a developer along, they were better able to understand how the customer viewed things and what they found most useful. The developers then discovered that the clients didn’t care about the cool technology behind the products but what they really wanted were features that would benefit them in an obvious way.
While trying to pitch a cool technology, an investor once told me, “the graveyard is littered with great ideas and cool technologies that never produced a market.
11) It is not wise to wait till you have 6 months of money left before you react.
I don’t know why but 6 months always seems to be the panic tipping point. I lived this a few times and each time we got to 6 months of money left the atmosphere in the company suddenly changed. Those that believed they were creating something of value to the market a week before, suddenly lost all incentive. When you have a considerable cash burn and 6 months left your options dwindle very quickly. It is best to react well before you get to this stage.
12) Give the money back to investors or move fast to reinvent yourself.
We saw that the market for our products and services were just not there however we kept moving forward, believing that the market would come around to see they needed our product. It would have been wise to give the money back or quickly change course towards better opportunities.
Twitter began as a podcasting platform called Odeo. When that didn’t gain traction they had the idea of an SMS communications tool they called “Twttr”, (with the vowels dropped on purpose). They gave back the investors money except those who decided to stay on with the new projects. I am sure they are glad they did.
13) If you have to micro manage then either you have a problem or you have the wrong people on your team.
I saw a lot of instances where managers had no faith in their teams and would micromanage everything they did (Founders were often the worst for this). Sometimes this was warranted because the hired employee was just not right for the position. Sometimes it was not and the problem lay with the manager who had a problem giving up responsibility. Either way is not a productive scenario and needs to be alleviated quickly.
14) If you haven’t executed on your current plan then you shouldn’t be spending a lot of time on your growth plan
If you calculate the money spent on time in meetings and documents preparing our growth strategies in various companies, the amount is ridiculous. This was done because there was an assumption that the market was going to show up in great numbers. This was before we saw one cent of revenue. Planning is important and has its place but you can’t let it dominate all your time and resources. You can’t continue building a house if you have a very shaky foundation.
15) If the founder and CEO constantly disagree and keep moving apart then you have big problems.
A founder has a particular character and skill set. CEOs are brought in because the founders do not often have the business skill set required to take a company to the next level. When each one constantly encroaches on the others turf you get problems. When these problems arise with the two forces leading the company then you have real problems. This is not an isolated incident and happens quite frequently in startups. If a mediator is not able to calm the situation then one has to go. Power struggles are very disruptive for a company of any size.
16) If you are on your third CEO then there is a good chance the founder is creating the problems.
Without a founder’s courage to start and develop a company we would have never known the likes of Apple or Google, not to mention thousands of others. However, founders can also be their worst enemy.
It can be shown statistically that the most common reason for failure among startups is because of the founders. They often lack the business skill set necessary to grow the company and they have a nasty habit of needing to micro manage everything. This is a great cause of friction, especially amongst CEOs brought in to lead the company and often ends up being the force that pushes many a startup into dissolution.
17) Cafeterias and common rooms are valuable space.
The most surprising thing I saw in startups I was with was the value of the cafeteria or common rooms. There were more discussions, innovations and ideas taking place during coffee breaks than any meeting I had ever been apart of. Something about these informal areas seemed to bring out the best in people. Where most large companies look down on employees milling around the coffee machine and consider this non-productive time, smart startups have integrated this practice into daily work life and it has paid off handsomely.
18) Try and get a few clients before you think about taking over the world
It always seems to be common practice among startups to go big or go home. This is why they all seem present themselves as the “Leaders of their space” in their presentations before they have generated a single customer.
It is not a bad thing to strive to be the best but I have found that the companies that were fixated on getting their first few clients and not on the millions they were going to get usually rose above everyone else, one client at a time. I remember hearing about a small company called The Facebook that was used among Harvard University students. It didn’t seem to be anything special at the time, just another Friendster type company. Then they became popular in other Universities and of course you know the rest.
19) If a potential customer is taking too long to decide then they don’t see clear value for themselves.
I took part in many client meetings where these potential customers had solid businesses. They would often want a follow up meeting in a few weeks or months and this cycle would continue. We needed the clients so we jumped at any opportunity continue the conversation. The big problem was we had limited resources and traveling to visit customers can get very expensive when there is no payoff. Many times these customers were curious but not that interested or didn’t clearly see the value we could offer them.
When this happens the startup should reevaluate their value proposition and clarify if the customer is truly interested. However, sometimes the customer says one thing but reacts another way. Sometimes it is better to move on and stop spending time on these targets and start building stronger relationships elsewhere. There is often great value in the ability to say No.
20) Don’t hire new people just because you have financing. There should be a clear reason and requirement to hire new staff.
Each time I was in a situation where we received additional funding it seemed to indicate the need to get bigger. So, a whole bunch of employees where hired. Many times their titles became so ambiguous I could not keep track of what they were hired for.
Companies with money tend to create positions for people that are not necessary. This may look like the company is growing in size (head count, not revenues!) yet when cash crunch time comes and your burn rate has increased considerably the weight tends to bring these companies down in flames. I was part of a few of these kinds of situations were the company’s expenses grew at a much faster clip than the revenues. You may know of a few of those floating around today!
21) Meetings should have clear goals and only include those necessary or have something to add otherwise it is a waste of time.
I would say that about 80% of meetings are actually a waste of time and unproductive. They often lose site of the goal they are trying to accomplish and drag on much longer than necessary. Knowing how to manage a meeting and get the most value possible from the participants is a skill in itself.
I was often called to meetings where I had no real input to share and I knew it. My presence was obviously not necessary. I was often part of meetings where my presence was necessary yet 50% of the participants were not.
In addition, I used to see developers, for example, tapping away furiously at their keyboards getting a lot done and who were obviously in the zone of peak productivity yet were called away to be apart of a meeting that didn’t absolutely require them to be there. That interruption broke their concentration.
Paying attention to these kinds of details in meetings and elsewhere can considerably increase productivity and focus towards greater achievements in a company.
22) Competitive advantage and sustainability matter
I worked with products and services that had a large number of competitors entering the market on a daily basis. It was not hard for us to develop these products, so therefore it was not hard for others. This is when the “Freemium” model started to develop. It was thought that if you could show large numbers of users or even potential users you could then attract a greater amount of financing, buy yourself some time, develop newer services and products to introduce to your audience and create sustainability in that way.
I found that this model failed most of the time. Companies that go viral for whatever reason don’t come along too often. I don’t believe that the quick shot method of generating as many “eyeballs” as possible is a road to success. I am also very skeptical about the numbers generated by many of these companies. I have subscribed to many different websites, only to use them once, if that, never to return again. Yet I know that I remain a statistic as a current customer, which is the farthest thing from the truth.
I still feel the best way to develop a business is to create real value for your customers and build that business one customer at a time.
This is the list that I came up with from my experiences. However, if you have other insights from your experiences we would love to hear about them.