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Startups: What Not to Do, Part 5 – Company-Killing Mistakes

In parts 12, 3, and 4 I looked at Mistakes 1 through 14, learned between my first startup, and when working inside and outside startups.

In this final part, I take a look at some final, serious, mistakes.



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Mistake #15: Understand what you should keep secret

In 2008, another startup I advised, and was briefly president of, was based on a keen understanding of the growing power of smart phones. The technical founder (see Mistake #13) had worked out a way of delivering very high-value services over a smart phone and insisted that we had to create our own hardware, despite the fact that the iPhone or even the early Android phones would have worked just fine.

When I suggested this to him, he’d go off on all the reasons why this was a bad idea. The guy really loved to talk about the technology, and to show how brilliant he was.

So he goes to a meeting with an established player in the space that was delivering the same service using trained agents. This company was quite large, and he was talking to their top people. Before he went on the trip, I told him not to get too detailed about the tech when talking with company.

Yup. He white-boarded the whole thing for them and, guess what, they came out with a very similar product for the iPhone about nine months later.

The guy got sued by two of his consultants, got investors to pay them off, and then disappeared, and nobody knows where he is now.

Mistake #16: Get the market timing right

In early 2009, I figured there was money in teaching business people how to use social media. I decided to offer in-person and online training, and by late spring, I was making a little money doing this.

One of my partners had tried to get me interested in this business back in 2007, but I wasn’t interested.

Well, by the end of 2009, there were so many people giving away social media training that the bottom fell out of the market. What used to cost hundreds of dollars was difficult to sell for $19 and I exited the market.

Mistake #17: Nobody will work as hard on your vision as you will

I’ve alluded to this in the preceding, and it really has been an underlying theme throughout my experience with startups. You may have co-founders or partners; you may have the cream of the crop of talented people working with you. That’s great. Just don’t expect them to match your passion.

Look for that passion in those you work with, and surround yourself not with the merely or even supremely competent, but with people who will outwork you and who will drive you to excellence.

The Last Mistake

The last mistake you might make is to assume that these are all the mistakes you need to watch out for in your startup. Heck, another half dozen or so mistakes occur to me now, off the top of my head.

None of this stuff is gospel, and I’m sure you’ll discover a few mistakes on your own.

But if I can leave you with just one more piece of advice, it’s this: Constantly challenge your assumptions.

You may find, as many startups have, that to be successful you need to completely let go of your mission, your plans, your partners and staff, and even your startup’s very reason for being. Being an entrepreneur means being flexible. It means being utterly convinced of your direction, but being willing to turn on a dime. Pivot, if you will.

So those are the mistakes I learned from 17 startups. But wait, you say, I thought you were in 19 startups? Ever the optimist, I’m currently in two startups, with partners. Each has got a unique product, without any real competition, looking for first mover advantage, and if we just can get 1 percent of the market . . .


If you’d like to hear about the other half dozen startup mistakes I didn’t write about, request them below. I’ll talk about one mistake per request.

Also, if you’ve got your own startup mistakes to share, do so below.

Startups: What Not to Do, Part 4 – Money, Contracts, Stubbornness, and Trust

In parts 12, and 3 I looked at Mistakes 1 through 10, learned at my first startup, when trying to start a company by myself, joining others’ startups, and starting a company with a co-founder.

Mistake #11: Not raising enough money

This one seems like a no-brainer, but I assure you, it’s not.

In mid-2004, I joined a startup founded by a buddy of mine and a guy he knew. This was by far the most successful startup I have been involved with, eventually producing six-figure revenues. But the founders didn’t raise enough money.

The company originally set out to raise a million dollar seed round. However, there was such a high demand for shares that the company cut off the round at $300K. “Why should we give away so much equity,” they reasoned. “We’re obviously on to something and won’t need the money.”

Wrong. They held on until late 2005 and then shuttered the company. I lost $30K on that one.

I’ve seen this problem in every single startup I’ve been involved with. So I can’t emphasize this enough. Would you rather have 1 percent of $1 billion, or 51 percent of a failure?

You must raise enough money to be successful. However, I believe if you can do it without involving the vulture capitalists, you’ll be better off in the long run. Remember that most VCs will only give you money if you can prove you don’t need it.

Mistake #12: Not having a contract

I got brought in to advise a biomedical company that had a unique product—imagine that! Their founders weren’t taking any salaries, and they were inches away from FDA approval. The buddy who brought me in was their CFO. He’d mortgaged his house, drained his IRA and was living on fumes when the FDA approval finally came through.

And they sacked him.

He had no legal relationship with his partners, and so he had to sue them to try to be made whole.

Get it in writing.

Mistake #13: Beware of the bull-headed founder

I got involved with a three-year-old startup that was building an online product in the financial services arena. The founder was a software developer, and I almost want to add this as another mistake: Don’t trust technical founders.

The founder was brilliant technically, but he insisted that his ecommerce product be free to all parties. I couldn’t shake his absolute belief that the company could prosper by simply taking the float on the money it handled.

This was in late 2007 and we all know what happened in 2008—the Great Recession. The float turned out to be a fraction of a percent, and his business model was toast.

He eventually came around to my way of thinking, and we found a new business model but by this time, nobody wanted to hear about his financial product.

Mistake #14: Trust but verify

In that financial ecommerce startup, there were a couple of consultants who were advising the group. One was a patent attorney who was handling the patent application for the technology.

Not only did this guy represent that the patent application fee was thousands of dollars more than it really was (to cover his fee that he didn’t disclose), but the patent application showed an LLC he created as the patent holder.

OMG!

Up next: Company-killing mistakes

Startups: What Not to Do, Part 3 – Trust, Attention, and Being Right

In Part 1 and Part 2, I looked at Mistakes 1 through 7, learned at my first startup in 1999 and when trying to start my own company. In this part, I take a look at mistakes learned when joining other peoples’ startups and starting a company with a co-founder.

Mistake #8: Trusting untrustworthy people

In early 2004, I joined a startup led by a guy whom I knew had had some previous business failures. He gave some convincing reasons for these failures, which I mostly believed. However, he was putting together the proverbial “NewCo” without a clear idea of what the company would do—just something in leading-edge tech. I suggested we focus on a then-new technology, Radio Frequency Identification (RFID) that was finally starting to get some traction after years on the verge. Walmart had just begun requiring that every pallet delivered to their warehouses had to have an RFID tag on it.

With my consumer packaged goods and syndicated data background, I suggested that while the consulting and sales of RFID systems were lucrative, the real value was in the supply chain data produced by the backend management systems. I proposed that we focus on that.

The CEO brought in a consultant to help the by now quite large NewCo working group sort out the way forward. Since this consultant was brought in to be impartial, we were told he would be ineligible to join the resulting NewCo in any capacity.

The guy did the gig, half the potential founders decided to go off and found a general IT services company, and NewCo soldiered on along the RFID services path. But now, despite the previous promise, the CEO said he was giving the consultant a seat at the table. Long story short, I challenged that and some other shaky ideas, and got booted out. NewCo never succeeded, but the CEO did manage to eventually create an RFID business with another partner which lasted awhile.

Mistake #9: Don’t take your eye off the ball

In some ways, this next story demonstrates Mistake #6 as well, but this was mostly on us. In mid-2004, I started a wireless Internet company with a partner. My original concept was a Geek Squad for consumer Wi-Fi, but my partner convinced me there was more money in business wireless.

In looking for a piece of infrastructure for our system, we became allied with a local Internet hosting company, who offered to handle all the technical aspects of our business. We landed a local hotel ownership company and built out two of their hotels. We were about to get a third hotel in a no-bid deal, when we became aware of a problem at the first hotel we had done. It turned out the original equipment selected and installed by our partner could only serve 100 simultaneous connections (the hotel had more than 200 rooms plus a full health club). Our partner knew this, and without letting us know, had been for months fielding help desk calls from irate customers who couldn’t log on.

It’s almost as if they wanted us to fail . . .

When we had the “come to Jesus” meeting with the hotel manager, suddenly we were told we were no longer going to be able to even bid for the new hotel’s business. Guess who got that contract? Our erstwhile partner, of course. And they eventually took the business for the other two hotels from us.

And it was our fault. At the beginning of our relationship with the hotel manager, we checked in with him regularly, but, since things were going so well, we allowed ourselves to get distracted by our business development efforts and were unable to nip his problem in the bud, before it lost us the business.

Incidentally, the owner of the hospitality company is now in jail for fraud, so perhaps this was a blessing in disguise.

Mistake #10: Being right doesn’t count if you’re not effective

My wireless company had another partner, one that wanted to run fiber optic cable to the premises in a rural tourist area. They were going to offer triple-play services—phone, Internet, and TV— at a really nice price point and they were interested in us covering the main tourist town and marina in the area with “convenience Wi-Fi” as part of their offering. They originally wanted us to install this right away, before the build-out of the fiber, so they could create buzz for their coming triple play product and secondarily for the revenue.

So we surveyed the town, worked with an equipment vendor to design the network, got all the quotes from installers and such, and were ready to go. We were projecting ROI within 18 months. But then our partner got a new vice president of marketing. This guy took one look at the plan and decided it would cannibalize their triple play product. I argued with him that anyone who would prefer 1 megabit Internet to 1 gigabit Internet plus phone and TV was not going to buy the triple play product in the first place.

I was probably right. Didn’t matter. The VP killed the project. The company began to run out of money, and I did get to meet one last time with my buddy, the VP of engineering, and said, “Gee, it’s too bad you didn’t have some kind of alternative revenue source to tide you over until you found your next round of investment.” He gave me a look, winced, and said, point taken.

What did being right get me? Nothing. Nada. Zip.

Up next: Mistakes learned the hard way

 

Startups: What Not to Do, Part 2 – Great ideas, Partners, No Competition

In Part 1, I looked at Mistakes 1 through 3, learned at my first startup in 1999. In this part, I detail some of the mistakes I learned from while trying to start my own company.

On My Own

I ended up striking out on my own in late 2000 as an IT strategy consultant with a couple of initial clients that kept me very busy. Many people said to me, “Gee, this is a strange time to be going out on your own. There’s a downturn coming.” If figured my two good clients would be enough for me to ride out the downturn.



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Continue reading Startups: What Not to Do, Part 2 – Great ideas, Partners, No Competition

Startups: What Not to Do, Part 1

I don’t know if I should admit this or not, but I’ve been involved in one way or another in 19 startups. In some cases I’ve advised them. In some cases I’ve invested in them. In some cases, I was one of the principals.

The reason I’m not so keen on admitting this is because I’m not writing this post from my private island in the Caribbean, but from my home office in Minnesota. Where I have a day job.



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Continue reading Startups: What Not to Do, Part 1