I have had the good fortune to be a part of several start-ups and early-stage companies. No two opportunities will be exactly the same (and certainly will not end the same) but there are many lessons that can be learned from the experience. Many of the lessons I have gleaned come from successes, but many were derived from failures.
In no particular order, here are my 14 Lessons Learned from Start-Up Failure:
- Be transparent in everything you do – Being transparent is not the same thing as not keeping secrets. All companies (and all people) have secrets and many of these should be kept by a small group of individuals so that they cannot be exploited by others. Being transparent means always telling the truth—even when you need to withhold some information for legitimate reasons. At the first start-up I joined—where I was employee #1 after the founders—we ran in to a lean period in terms of our angel funding. Basically, we were running out of money. Rather than talking with the employees (there was more than just me at this point), paychecks just stopped showing up. Multiple paychecks. Instead of being transparent, the founder would keep the door of his office closed on paydays or work from home. I will leave it to your imagination as to what this did to morale and trust.
- A sales pipeline is not the same thing as actual sales – When talking with potential investors, employee candidates or even clients, it is tempting to discuss a start-up’s sales pipeline in the same manner that one might speak about actual sales. Not only is this not transparent to potential partners but it is probably outright lying, especially if you do not qualify your sales pipeline with likelihood-to-close percentages. You may think it sounds better to talk about your $3 million pipeline but if your close rate is 0.1% and you have not actually sold anything yet this will come back to haunt you in the future. Additionally, knowing the size of a potential market or client is not the same thing as having an identified lead that should be included in your pipeline. It may not look as impressive, but it is better to be conservative and then over-deliver.
- Bootstrap as long as you can – A question all start-ups have to answer is: “When do we take in outside investment capital (if ever)?†The answer to this question will be different for all companies but you should certainly try to bootstrap as long as you possibly can. For some, this may be no time at all because you are trying to capitalize on a Blue Ocean opportunity and need to get to market quickly and then scale even more quickly. For others, this may be years. Whatever the situation your company is in, try to make it as long as you possibly can on your own money. Your life will be much easier. Taking on an investor—just like hiring your first employee—changes the game considerably. The founders are now responsible for, and accountable to, more than just themselves. This should be treated as a near-sacred commitment.
- Spend less than you think you should – Every start-up feels like they need to look larger than they are to be taken seriously in the marketplace. While this may be true, it does not automatically mean that you have to spend lavishly to keep up the appearance. Multiple companies I have been a part of looked for expansion and prospecting opportunities outside of their home market first where Southwest Airlines flew because of the lower airfare prices. One company was almost $20 million in revenue before we had our first office. Another, however, spent frivolously on consultants (a former politician that was paid to introduce the company to other politicians in Washington D.C.) and administrative assistants before we had any revenue because one founder wanted to be viewed as a player on the business stage. Every company needs to honor the fiduciary responsibilities that they have but start-ups need to bake this in to their company culture from inception.
- Raise more than you think you need – Every business plan you will ever see will include a pro-forma budget and revenue estimates for some time frame. While these are necessary to communicate the potential value of the organization to investors, a very wise person once gave me this advice: Cut all revenue estimates in half and double the amount of money needed to reach profitability. Once you do that you may be a bit closer to really understanding the financial prospects and needs of the company. Founders should do the same thing. Do you think it will take you $1 million to achieve profitability? Then try to raise $2 million. It is always easier to ask once for more than you need rather than having to go back and ask a second time because you underestimated the needs of the company. If you are concerned with diluting the shares in the company too much in an angel our first round of funding, do not be afraid to get a little creative with things like multiple stock classes or convertible debt.
- Do not have resources specialize – Most people that have been through a start-up have similar stories of being the CEO, switch board operator, salesperson, garbage collector, and business analyst all in the same day. Start-ups are, by their very nature, lean organizations when it comes to employees (although not always lean in other areas). You need highly talented individuals that are committed to the company and that do not mind rolling up their sleeves and getting their hands dirty. Even if it means cleaning the toilets from time-to-time. It is especially tempting for founders to feel like they need to specialize and delegate less palatable tasks but employees like leaders that lead by example. Besides, there will be plenty of time to worry about “highest and best use of timeâ€, “role definitionâ€, and teaching employees to “manage up†once you have enjoyed a certain level of success.
- Do not scrimp on the lawyers – While I certainly advocate start-ups scrutinizing every expense as if it will need to be paid with your very last dollar, you really cannot afford to scrimp on legal fees. LegalZoom.com may be a good resource to help you register your LLC in the Delaware, Florida, Nevada or whatever state you think will be most advantageous to you but you will quickly need more experienced counsel, especially if you are building a business around some form of intellectual property. You will want to find a lawyer that is a good fit for your business overall, and not just on the checkbook. Are you building the business with a transaction as an exit strategy (acquisition, IPO, etc.)? Find an attorney that has M&A experience. Are you a technology company that will have the majority of its value locked up in intellectual property? Find an attorney with direct software (or hardware) experience. Ask around. Interview several lawyers, get quotes on retainers and hourly rates, compare notes with others, and then select the one that best fits your needs. Then be prepared for the bill.
- Launch before you are ready – There is no such thing as perfection in this world, regardless of what subject you are evaluating. Humans are not perfect and neither are companies or products. There will always been room to perform so do not worry about having a perfect product at launch. Have a product (or service) that is good enough that customer’s value, put it out in the world, and get ready to listen to the feedback that will invariably be brought to your attention. If you wait for perfection, you will be waiting a very long time. So long, in fact that, assuming your idea is a good one, someone quicker than you will probably beat you to market. Additionally, all start-ups are built on assumptions; Lots of them. Launching early will allow you to test some of those assumptions (especially those about what the customer actually values) and make changes before additional investment is made.
- Iterate Quickly – When you launch before you are ready, you will have an immature, incomplete product (or service) on the market. You need to make sure you have appropriate feedback loops built so that you can iterate quickly with fixes and enhancements. You also need to have filters in place to ensure that the feedback you are listening to is appropriate for your situation. Just because your first (or biggest) customer asks for something new does not mean you should go out a build it. You need to have a vision for what you are selling, a vision that is shaped by what you are hearing, but also a vision that does not get pushed here, there any everywhere by the whims of the customer.
- Listen to your customers, especially when you do not like what they’re saying – The whims of the customer, may be vitally important. Read through the product reviews on Amazon sometime. What you will find are wide ranges of experiences with the same products. Some people absolutely love the newest widget for sale while others completely pan the same SKU. Who do you listen to? Neither extreme. Instead, listen to the feedback (especially the negative feedback) that is consistent across multiple customers. Find the trends. Address the needs of the masses while still staying true to your vision for your product. One start-up I worked with had commercialized some software from a large, academic medical center. The software worked great for them. But the consensus of early prospects and customers was that what worked for academia might not work in other settings. We pivoted just a bit, iterated quickly, and came out with an even stronger product.
- Good ideas do not always generate revenue – I love history. Especially European history. Especially European history from the Greek city-states through the Roman Empire. Based on this love, I have always had an interest in international business and expansion. During my tenure at one start-up I fell in love with the idea of taking our healthcare software to Europe and my CEO shared the same passion. It was a good idea but terrible timing. We spent an inordinate amount of time putting together a business plan when we had yet to sign our first contract domestically. The good idea took our eye off the tasks at hand and never led to a single Euro of revenue. I have what I think are some pretty good ideas every day. I keep a notebook for them. I will come back to some of them one day but many of them will simply be good ideas that should never be acted upon.
- Be wary of family money – Early-stage companies often raise angel money from individual investors and these individual investors are often family and friends. Dave Ramsey has a philosophy that states that family members should never loan money to one another. Rather, simply make the money a gift without strings so that when the money is not able to be repaid at a later date, no one gets upset because their expectations were not met. Even if family and friends want to invest in your start-up, you should set the expectation that they may very well never see a dimes worth of return and may lose all of their original investment. This way everyone will be pleasantly surprised when you do generate a good return for Grandpa Smith.
- Be careful with your board – The Board of Directors is not a vanity exercise. Some people want to be on a board because they like the way it looks on their resume. Some founders add “Chairman†to their title because they believe it means that they have “made itâ€. Either attitude or approach is dangerous to your company. Founders should attempt to fill their board with individuals, investors, and advisors that add value to the company. Seats should be ruthlessly guarded and if a member is not discharging their duties appropriately they should be replaced according to the by-laws governing the board. Large investors are sometimes given a board seat in recognition of their financial commitment to the company. Be careful with early-stage angel investors, however. They need to fully understand the role of the board and what will be asked of them if they are added to it.
- Do not drink the Kool-Aid® – Entrepreneurs MUST have passion for what they are building. If they are not, they will not be willing to make the sacrifices necessary to make their vision in to reality. Employees need to be careful of this passion, however. Employees should believe first in the product, not the CEO. Miss-guided passion can blind founders and employees alike to the realities of their business. Passion can make people myopic; Make them believe their own press and everything that is coming out of their own mouths even though the fundamental reality of the business does not support this blind faith. A charismatic, rock star-like CEO can be an asset to a company, but they must be pragmatic and willing to listen to counsel that may run contrary to their vision to be successful over the long-term.
This is my personal list. If someone has ever been a part of a start-up, regardless of the level of success that organization eventually enjoyed, they will have a different list. Have you learned other lessons? Leave a comment below or contact me and I will add it to my list (with full credit give to you, of course).
