So far, at NXTP Labs, we have invested in more than 160 early-stage tech companies. In our quest for finding the next $1B company in LaTam we’ve come across many really good startups that, although might not be able to break that mark, they are poised for doing great things.
It’s also natural that we’ve found and sometimes, unfortunately, invested in many companies that, in hindsight, turned out not to be really good investments. In some cases, these companies failed for reasons that were unforeseeable or problems in their business models that were impossible to detect in the first place. But for many other of these failed startups, there were clear, bad signs telling us that we should stay away from them and we still decided to ignore those signs in hopes they would be able to turn things around.
Even though we can’t do much with these companies we backed and went down, we did learn from our mistakes. Nowadays we try to be very critical and thoughtful about the kind of companies we decide to back so we don’t make the same mistakes.
In these series of articles, I will try to explain at least 10 typical issues we’ve had in the past with many startups, why I think they went wrong, and what we learned from those mistakes.
I’ve decided to write one article per lesson as while writing this piece I discovered there’s so much to say about each mistake/lesson learned that it wouldn’t fit one article alone.
Without further ado, here’s the first most common mistake we’ve made while investing in startups:
Not making sure the entire team was dedicated full-time to the project
Since we usually invest in early-stage companies, most of the entrepreneurs we see are still trying to figure a lot of things out:
- Is this the right idea?
- Did I choose the right co-founders?
- Should I leave my day job to work on this?
- What if this doesn’t work?
- What if I’m not made to be an entrepreneur?
Because of that, most of them still haven’t made up their minds on whether they should risk the financial security that a day job supposedly gives in order to build a company on their own or not.
When it comes to resisting full-time dedication to a startup, I’ve seen two kinds of people: those who don’t want to leave their only source of income and status, and those who can’t.
Those who don’t want
These people are still deciding whether or not they want to become entrepreneurs. They’ve seen an opportunity, but they´re afraid to leave their job at a huge company to risk it all. So what’s the solution? Start working on the idea in their free time.
The problem with these guys is that even when they might be verycapable of building a company, they have a lot of distractions; they can’t fully commit to the project, and if things aren’t working as expected, they’re likely to jump ship and abandon their dream.
Those who can’t
Many founders that approach us are in the early stages of their startups, thus, they are not seeing a dime from the project yet, and they haven’t received any funding yet, other than our initial seed funding or what they might have been able to save to get started.
Even though we invest $25k in early-stage startups when they haven’t yet opened a financing round and most of these startups are based in LaTam, where that money usually lasts longer, it’s not enough for a 3-4 people team, focused solely on their company, to survive for 4 months, especially if they have families to support.
It’s only natural that both these types of entrepreneurs don’t want to jump 100% into their startups without any guarantees, as they are just getting started and are usually first-time entrepreneurs. They need to see some indication of success (which often comes in the form of money) before they decide to leave their day jobs, or only source of income, in order to fully dedicate themselves to their project. Usually, that little push they need is our investment.
For us, this creates a type of “chicken and the egg problem”. We feel safer investing in teams that are 100% committed to their startup, but for them to make such a commitment, they want to have some money in their bank accounts. Most of the time, entrepreneurs tell us: “I will work on this company full-time if you invest in it”.
Needless to say, we can’t risk investing in them if they don’t take such risk themselves first. But we haven’t always taken this stance. In the past, we did invest in founders that weren’t fully committed to their startups yet, as they needed the security only a bulky bank account can provide.
This creates a problem both for the founders and for us, in the short term. If the founders are running short on money, and they have to start taking side jobs or keep their full-time job to pay rent, they’ll end up losing focus and the product will suffer. It will either remain unattended and lose quality, or it will take longer to complete, risking time to market and increasing the chance that a competitor will appear.
We have had mixed results when investing in these kinds of teams. Some of them ended up going well, as they quickly found a way to generate enough revenue to pay the bills, and others went on to raise money during or as soon as they finished our acceleration program. But for every startup that had this issue and made it ok, we had 2 or 3 that were not able to survive long enough to start seeing money come in and had to find an alternative source of income for their founders.
And that’s where things start to go wrong:
- They start doing consulting as a side job to pay the bills and lose focus in the project.
- They accept money from investors with terrible terms or from investors that don’t really have the means to help them.
- They start doubting themselves and others.
- They start arguing with their co-founders over those decisions and spend more time fighting than actually doing something productive.
- They blame the co-founders that are still between jobs for not working enough on the company.
- The less committed co-founders end up leaving for good.
What we’ve learned
One might reach the conclusion that the solution is not to invest in startups whose founders are just getting started. We should work with them when they have already found a way to make their startup profitable and have everything figured out. Right? Yes and no… If we want to avoid taking risks, yes. But we end up sacrificing the potential for huge reward.
The big issue for us is investing in a startup where the founders are not fully committed. If that’s the case, there’s a huge risk something will go wrong and the time and money we invested will be lost. If the problem for them is money, that can be fixed. But if the problem comes down to not being sure if they really want to risk it all… Then there’s not much we can do to fix that.
So, what have we learned? We learned that commitment from the founding team in the early stages is key for a company to develop successfully. We should only invest in teams that are not afraid of taking risks and that are capable of fully committing to pursue their vision until they make it a reality.