(We continue with the next 10 startup founder mistakes to avoid, in this post)
#11 Not having a vesting agreement between the founders
Let’s say 3 people start a startup today and all of them take one-third equity each – what happens, if after 2 years, one person decides to leave, taking away 33% of the equity while the other 2 want to continue doing all the hard work? Vesting is the process in which parties in the startup accrue non-forfeitable rights over the stock ownership of the company. The vesting schedule defines when and how the shares of the company will be distributed to the founders. So it can be agreed upon, regarding the 33% each of the 3 founders own, that each year they each get ⅓ of this 33%, depending on whether they’re fully committed to the company. After being involved in over 1,000 startups in the last few years I’ve learnt that quite a few of the early day founders eventually do not stay with the company. The more founders a team has, the bigger the chances of “drop-outs” along the way. Many founders waste a lot of time discussing how to deal with equity if one of the founders leaves. From my own experience, i know that it is better to make such arrangements in the early days of incorporation instead of waiting for this, once founders are not fully aligned anymore. The numbers speak for themselves…it is only a small percentage of founders that stick together in the long run.
#12 Not using profile tests (e.g. Facet 5) to understand how your co-founders and new hires operate
If we know that about 50% of startups fail because of team blow-ups and not getting culture right why don’t we assess personal traits and invest time to really understand what drives people? At Startupbootcamp (where we help startups and scaleups accelerate) and Innoleaps (where we build corporate startups and accelerate them) we’ve been using a profile test named Facet5 since the early days. A Facet5 profile gives you a clear overview of 5 elements :
- How strong someone’s “Will” is
- How high someone’s “Energy” is
- How high someone is on “Control”
- How strong someone’s “Affection” is
- How “Emotional” someone is
I’ve seen thousands of Facet5 profile tests of founders and know more or less, based on the metrics that we have, the kind of profile a CEO/founder should have to be a real leader and entrepreneur. I also know what profiles in many cases do not match with the CEO/founder role. Facet5 also lets you compare founder profiles and highlights “green” & “red flags” in a founding team report. If you enter a Startupbootcamp or Innoleaps program each of the founders has to conduct a Facet5 profile test. It does not so much as say what you are good at and what not but it does highlight what drives and motivates you. For our Startupbootcamp programs, when it comes to the point where we have to select the final startups, I always spend 2 days with a psychologist and discuss the individual and team profiles of the startups we consider accepting into our programs. I always recommend team members to study each other’s Facet5 profiles. It gives you tons of insights about your partner’s way of thinking and acting. Everybody that we hire at Startupbootcamp, Innoleaps and The Talent Institute completes a Facet5 test as well. By now, i know which profiles fit best with our company culture. You might say that, ‘well this is very confidential information, why would people share this with you?’ I believe in total transparency. Understanding your motivation, drives and way of thinking helps me and the companies I’ve launched to help our team members better. In many cases I share my Facet5 profile with new team members we bring on board as well. It helps them understand who i am and how I think and operate better. I encourage every founder to at least study each other’s profiles and even better, use profile tests for every new team member you consider to bring onboard.
#13 Thinking the idea is the most important thing when you launch a company
It’s important to realise that having an idea or getting a product to market first isn’t what matters. Being successful is ultimately all dependent on having the right team, with the drive to pull it all off (see #7). A great idea with a “shitty” team will never succeed. A shitty idea with a great team might pivot the idea and grow it into a successful company. It’s a thing that most experienced investors know. Do you bet on the horse or the jockey? In the case of startups it is the jockeys that ride the horse. All seasoned investors know that you have to make a bet on the team. So why is it that many founding teams already know that they do not have the best team and still launch? It’s simple, because they are like me, optimists, thinking: ‘we’ll figure that out along the way’. I know that there are many things you can figure out along the way, but not getting your team right is not one of them. I truly can’t emphasize on this enough. It is better get your team right from the start. Another thing I’ve learnt since I’ve started investing in startups and scaleups about 16 years ago is that the larger the founding team is, the bigger the problems get. My rules for this are:
- 1 founder on the team is really hard – not impossible but extremely hard. This founder has to bring at least 1 other founder with complementary skills onboard
- 2 founders with complementary skills that have preferably already worked together before is great and often works really well
- 3 founders with complementary skills that have preferably already worked together for a longer period of time e.g. 18-36 months, is also great and often works well
- 4 founders: Here is where things get more complicated. Why? Because of reasons such as slow decision-making processes, disagreements, 4 different characters etc.
- 5 or more founders on the team? Then, run away!
No matter how important all the founders are please keep in mind that you need 1 captain on the ship, not 2 or 3. Someone needs to be the CEO. Who that is does not depend on who came up with the idea. It only depends on who has the best entrepreneurial skills and the drive to make things happen as well as who is able to inspire others to join the team and buy into the solutions the startup provides.
#14 Not hiring an amazing operations person
When you’re scaling up, your days are going to be packed with many different tasks. You’ll realise that in order for yourself and the company to grow, you’ll need to organise yourself and the company. Most entrepreneurs aren’t that good at organizing. At a certain moment you should bring someone to the team who is able to run the operations like a well-oiled machine – with a full focus on taking things off your plate. When you have that amazing, smart, adaptable individual to handle the fire fighting and operations part of the business – that is when you’ll have your time freed up, to do what (you love) you do best: Being the entrepreneur!
#15 Not managing your cash flow
Your cash flow should be something you focus on every week. Like they say, ‘Cash is King’; No cash means no King, which soon will end in bankruptcy. Even if you’re an outstanding entrepreneur in every other way, you have to put your focus on managing your company’s cash flow to avoid putting your business in danger. In the first few years of your new born company your P&L and balance sheets are way less important than cash flow. Cash flow basically tells you this:
- How much cash is coming in this month
- How much cash is going out in this month
If you have more coming in than going out, you have positive cash flow. If you have more going out then coming in, your cash flow is negative. Quite simple right? Most startups in the early days will have negative cash flow. They are investing in the product, people, marketing etc, and have a burn rate that is higher than the income they generate (which in many cases is zero or close to zero in the first 6-18 months of existence). That’s why most startups need to raise funding. There’s nothing wrong with negative cash flow as long as you keep track of it and understand the following:
- When you run out of cash, so you can start raising your next round of funding with enough money in the bank.
- When you need to start making some revenues to cover your costs and create positive cash flow.
I see many startup founders not focussing on their cash flow. Even when they start generating revenue, they forget to stay on top of the cash that’s going out and the cash that’s coming in. They forget to negotiate good payment terms with their customers. They think that if they make a profit this also means they are cash-flow positive. It’s one thing to have an admin person create a cash flow forecast – but in the end the CEO should know exactly what the company’s cash flow forecast looks like.
#16 Hiring a B2B VP of sales and thinking (s)he will actually sell
I’ve learnt the hard way that many sales people are great at selling themselves but are often not that good at selling your solution. Why is that? Because, especially in the early days of any startup, you are not selling anything. What you are doing, is customer discovery, learning about your customers’ problems and evangelizing your possible solution to potential customers. I see many startups make the same mistake I made myself several times in the past. They think ‘let’s bring in a hotshot sales person from a corporate.’ Most of the time it’s a person that is fed-up with corporate life, thinks that startups are easy and less complicated than corporates and want a career move. They ask for a corporate salary, lease car and pension funds, forgetting that joining a startup is not for everybody. Actually, it’s not for most people that have a corporate background. In the early days of every startup it is the founders that do “sales” – but this is not “selling”. What they are doing is customer discovery. It is only after you’ve found that product market fit, have done pricing validation, know exactly what the right price point and business model is, AND feel like you can sell more if you bring more sales people to the team, that you should consider setting up a sales team to be coached by a VP of sales. The VP of sales, should be the one who is recruiting the sales team, advising your sales reps on their current deals, optimizing the sales process, defining the big picture: “what’s the most effective sales strategy?” and lastly, closing deals. It is more crucial for a VP Sales, to hire and train sellers then to actually sell. Only then, sales becomes scalable.
#17 Launching a new country based on market demand and not having an International strategy
Let me tell you a scenario I see happening over and over again:
“wooow we’ve just got our first order in from Peru. They want us to adjust the product a little bit in order to have it fit with their needs. I’m flying there next week to discuss!”
Peru? What the f*ck? You are hardly doing any sales in the country you are currently from and now you want to adjust the product and sell it in Peru…?
I’ve launched many companies in the last 30 years, some of them in really great countries to enjoy a holiday in, but in all honesty they were not the best countries to operate in. When I was with Endemol in the 90’s, we launched subsidiaries in Belgium and Portugal. These were in fact the 2 smallest Television markets in Europe. At a certain moment we figured out that launching a subsidiary in a small country takes more or less the same effort as launching in a large country. However the revenue potential of a small country was way lower then pointing our expansion towards a large country like the UK or Germany. So, we developed an expansion strategy: ‘Let’s focus only on those markets that are generating most commercial and advertising revenues.’ This is where commercial TV would grow fast and where our clients were in demand of more entertainment content. With Startupbootcamp we’ve also been too opportunistic in my opinion. We grew where there was demand. Recently we’ve decided to focus more on those countries where we foresee growth for Startupbootcamp but also for Innoleaps and The Talent Institute. We do our research first and based on that, decide which markets to enter and which not. This is hard and sometimes leads to discussions because we see opportunities everywhere. I’ve however learnt that you can only do so many things well at the same time. That’s why you have to really think about where you need to put your focus on. In the end, global expansion is a long-term investment and not a get-rich-quick scheme. You have to plan for gradual growth, and be prepared to take your time with it in order to reap the benefits. Study the market and have a plan in place – have you devoted proper resources to expand? Do you have the required operational and organisational processes in place? Do you have sufficient finances for this expansion? Have you figured out exactly what are the elements that make certain markets more attractive to your company?
#18 Not doing due diligence on your investors
Investor due diligence is typically dreaded – but it is a mistake to forgo this practice. Not all investors are the same, and working with the wrong investors, could be detrimental for your business. To make sure you end up with the right investor(s) for your company, you have to do due diligence on them as well as they do on you. Speak to other investors, speak to entrepreneurs who’ve worked with that particular investor, look into their business(es) and financial status, and get some basic online research done. I always tell founders to ask an investor that wants to invest in their startup, to provide 3-5 intros to startup founders (s)he has invested in before: 1 or 2 startups that are doing ok or well and at least 2 that have failed and where the investor lost it’s money. You’ll be amazed about the amount of information you’ll get from these conversations and how you can leverage this information in your negotiations with the investor. This will help you also decide if you want to bring the investor onboard, or walk away before you’ve come to an agreement. Next to this you’ll make a good impression on the investor as well, and show that you take your business very seriously. In case an investor is not able to provide any introductions be aware that you could be the first investment the investor will be making – which means you will be the “experiment”. Ofcourse, this brings in a form of ”risk” since you are dealing with a first time investor.
#19 Not reporting or keeping your investors up to date
Many startups and their founders tend to forget that one of the main reasons angel investors invest, is because of the fact they want to contribute to the growth of the company. In many cases they fall in love with the founders and the idea, and get really excited about the potential of the startup. Many startups tend to forget about this as soon as they have received the payment of the investor. Money is in the bank and somehow, keeping the investor(s) up to date is not seen as a core task of the founding team. This results in 3 things:
- Frustrated (angel) investors.
- Missed opportunities.
- The chances of the investor investing in the next round, decrease.
Most investors love to be updated, asked questions and maybe even have a coaching session with one of the founders etc. They (in most cases) do not want to run the company but want to be kept in the loop. Not just when things are going well but also before things really go bad. As such, from the moment entrepreneurs receive investments, they should be obliged to report to their investors on how the company is performing and how the money is being used. I always advise to entrepreneurs to use the following “template” in the early days when there is no revenue yet:
- What did we do last month?
- What will we do next month?
- Where do we need help?
- Short update on cash flow?
Startups that communicate better, perform better.
#20 Not preparing well for your shareholders and board meetings and spending 99% of your board meetings, talking about what happened
Seems obvious enough – but it is important to remember that the purpose of such meetings, are related to governance, discussing new opportunities and asking for advice or help. A good board helps the founders and her/his team manage their business and provides them with counsel, support and challenges the founders on strategy, tactics and operations – but a board is only as good as it is managed. So, before your meeting, you have to ensure that all the important topics to be covered are laid out in the agenda properly. One thing I often see is that 90% of the time board meetings are focussed on updating the board and shareholders on what has happened. (This is what the monthly updates are for, see #19.) If there are any questions on these updates people should address them before the meeting so they are put on the agenda or dealt with in the first 20 minutes of the meeting.
Many founders hardly spend any time on what needs to happen next, where they need help, where board members/shareholders could help, possible new business models, challenging questions regarding the company’s strategy, investments, new hires etc. This is a missed opportunity for the founders but also for the board members. If you think about what you want to get out of board meetings in advance and prepare them well you’ll see how much you can gain from these meetings. On top of that, you make your board members and shareholders feel involved and respected.
We’ve covered #11 to #20, of the biggest founder fuckups as told by Patrick De Zeeuw. Check out the next and final edition to this blog series, coming very soon! Whether you’re an entrepreneur looking to scale your business, or a corporate who wants to drive business transformation – if you’re interested in collaborating with Startupbootcamp, The Talent Institute or Innoleaps, drop us a note!