10 Mistakes startup founders make and how to avoid them.

After founding my own startup and spending a few years working with startups I’ve seen a lot of mistakes that founders usually make. Unfortunately, these scenarios are more common than we’d like to think. Here is my roundup of the most common mistakes and how to avoid them.

1. Deciding on the wrong type of investor

Money is money, right? Wrong! Getting funding from the wrong kind of investors can end up very costly later on. So, be careful when choosing the right investor for your business.

If you are getting money from friends and family, they have to be those who truly believe in you and your business.  Like it or not, most early stage companies fail. Think you probably will feel awkward if your business fails and this may affect your friendship, even if your friends are not bothered. Also, if you can’t pay your friends and family back, how would you feel? 

Early-stage startups usually seek angel investors because some are turned down or still too small for VCs. Finding the right angel investors is also crucial - inexperienced angel investors expectations that are disproportionate to the level of their investment and tend to make unrealistic demands.

The same goes for VCs -  startups choosing the wrong one can result in the end of your business. Your relationship with your early stage VC is critical in the first couple of years. Then, you will need someone to be there for your business not only when things are going well. Make sure you understand the experience they have. 

One way is to seek portfolio companies and former portfolio companies, preferably including companies that failed. Find out what advice the VC has given them, whether they were helpful in getting the next round of funding and how the relationship evolved when things seemed difficult. 

In a nutshell, do your due diligence thoroughly for either angel and VC investors before taking up your first or next funding round.

2. Not fully knowing your agreement terms

Bad / unethical  investors usually smell desperation. If your startup is desperately seeking investment, it is easy to fall into a bad investment deal. 

For instance, investors who want to take too much of your equity in relation to the amount invested is a big red flag.  Other terms like atypical share preferences, interest interest, anti-dilution provisions and anything else that makes it difficult to secure further funding can be the deal-breaker for your business.

If you are unsure about the terms of your investment deal, get expert advice. Go for someone that has experience with startup investing and are familiar with this sort of deal.

3. Not having a “Founders Agreement”

Imagine this scenario:  you and a couple of friends decide to start a company. You guys have an amazing idea for a business and decide to split the business equity. All of you have the same equity percentage. Then, after a while one of your friends (and co-founder) decide to leave the business for whatever reason. Well, there goes one third of your business. 

This sounds a bit unfair but it’s all so common. On top of finding someone to replace the departing co-founder, rarely an investor will invest in a company that one third of their equity is held by someone that is no longer with the company.

So, how do you avoid this scenario? Before you start a business with others, you should have a “founders’ agreement”, providing for “reverse vesting” of equity. This agreement secures that the founder who leaves in the first year will retain no equity, and in case they leave after the first year, they will only  retain an interest proportionate to time they stayed in the company.

4. Making the wrong exclusivity agreements

Great, you found a potential investor that is perfect for your business and all seems to be going well. Then, the investor presents a non-binding contract that says they perform due diligence and in your business and you will not enter into negotiations with any other investor for some period of time while they go through with the due diligence process.

It’s clear why investors want to protect their investment and they don’t want to run the risk that you will deal with another investor in the meantime. 

You need to understand that, you will not be able to speak to other potential investors, without yet any commitment that this potential investor will actually invest in your company. If, for some reason, this potential investor decided not to invest in your company you will have lost weeks and even months looking for other potential investors.

If you agree to exclusivity, it should be for a very short period — no more than a few weeks in my opinion.  On top of that, you should only agree with this type of agreement if the investment deal is highly likely to go forward.

5. Not choosing the right corporate partners

If your startup is partnering up with a corporate business, it’s usually very difficult to navigate this partnership if your potential corporate partner hasn’t collaborated with a startup before.

First of all, find out how they manage their work with other startups. If their previous or current partnerships are working will together, that is likely they are well equipped to deal with your business too.

Corporate innovation groups can be very useful in helping you manage your relationships with your future corporate partner(s) but it’s not everything. Onboarding and working with startups is not an easy task for most corporate businesses. 

If you find out that your potential corporate partner hasn’t been successful with their previous startups partnerships, don’t think your business can or will change this pattern. If a corporation hasn’t built an internal innovation culture yet, they are unlikely to be able to collaborate strongly with innovation with a startup.

6. Not testing your product enough before launching

As the saying goes: “The early bird catches the worm”, right? Not quite

Some might say, go to market, scale quickly and deal with the challenges as you go along. This can work in some cases, with very specific business types but in their majority, this strategy won’t work. 

Not having a real pre-launch testing can be a deal breaker for your business in the long run. Early stage customers or appropriate testers can help you build something that doesn’t yet exist, at least not in its final form.

Don’t go ahead of yourself.  Having patience and most of all, humility to listen to feedback is essential for a successful launch. 

7. Underestimating the competition

It’s a crowded market, especially for tech startups. You and your competition are trying to grab the attention of potential customers as much as you do. The underestimate or misjudge your competitors is an easy trap to fall into.

First of all - think about your product. As I mentioned, don’t go to market too soon. Your potential customers won’t come to you if they can find something better from your competitors.

Whatever amazing your product or service is, we live in a customer-centric market. If your competitors already own the customer, or have a better relationship with their customers, they already have a massive advantage.

Take a look at what your competitors are doing right, and most importantly, that they are doing wrong. With that in mind, build your strategy around that.

8. Not managing your financial resources

That sounds obvious but for a startup business cash is the lifeline. If you run out of cash, you can’t raise funds quickly enough, potentially.

Have a well-detailed plan for the milestones of your business. If you are not too sure, ask for professional financial advice - someone with a clear understanding of startup businesses.

If you go for another round of funding, leave a considerable amount of time to do so. Be ruthless Using your business cash, especially if you  find that the next fundraising is going to take longer than you expected. Simply put, even if you manage to raise a lot of capital, the company won’t survive without a clear financial planning.

9. Hiring friends (or the wrong friends)

Early-stage startups are always eager to start and here’s why making a bad hiring decision can cost a lot of money and time from your business. 

We all have friends that can be enthusiastic about our new business idea but ask yourself if they have the same entrepreneurial spirit as you have. 

They can be great friends, excellent and skilled professionals, but do they have what it takes to work for a startup?

Perseverance is one essential quality for entrepreneurs. Being resourceful, I mean, making the most of any situation with what you have is another key point to look out.

Bear in mind that, when a new employee quits it’d take a good slice of your time and business financial resources to be with them. 

So, before you hire a friend, however close to you they are, look for these basic qualities.  Don’t just hire them because you like them - that seems obvious but this is a really common situation.

10. Not looking after your (and your co-workers) mental and physical health

If you have a burn-out, who'd run your business?

Without a doubt, it’s really stressful to be an entrepreneur. You and your co-founders need to have appropriate routines to look after your health, and also watch out for each other and for your employees.

A good mental and physical health should be part of your company culture. Otherwise nobody will want to work for a company that requires unrealistic work hours and doesn't offer any work/life balance.