8 Startup Value Destroyers

We know that startups are exhilarating, energetic, futuristic in their aspirations.
We also know how fragile, fleeting and wobbly they can be.
We know that most startups fail. (here)
We also know why they fail. (here)
We read too many post-mortem analysis. (here)
We do not write enough pre-mortem, as Nobel Prize Daniel Kahneman advised us to (here). We would be better prepared to pivot and iterate.

We know that ‘bad’, ‘wrong’ or ‘mistimed’ decisions destroy value: ‘bad’ spirit between founders, ‘wrong’ recruitments, ‘mistimed’ bets.
They are hurting the startup chances of success.
We knew what was at stake and we were not caught off-guard as avoiding the ‘bad’, ‘wrong’ and ‘mistimed’ of this world is a daily exercise for entrepreneurs.

Let me present a few counterintuitive behaviors.
They operate silently and can seem good when wrongly approached. They are overlooked despite precipitating startups into the grave: they are the startup’s value destroyers.

Corporate investment

Corporate is generally the ultimate goal for startup exits.
Startupers should naturally develop good relationships with blue chip companies or corporate ventures.
The danger comes when corporate investment intervenes too early in the process. When startups get grabbed too soon, they can become the R&D sub-sector of a big company.
Too much corporate investment (>15%) at any phase of the development will deter competitors from participating in the project and will stop bigger rivals from bidding for the full company.

Misalignment

Every startup tries to find an alignment of incentives between founders, investors and clients. This dream situation never happens.
It is fine. Let’s be reasonable.
VCs and founders need to be open and genuine when those cases happen.
No hidden agenda will help the cause.
Exit’s misalignments are standard as founders want to build long-term businesses and VCs want to maximize short-term returns. Discussions about the exit’s valuation and timing can be frantic, but finding common grounds through candid dialogue seems like the best way to go.

Excessive terms

A simple deal is better than a complicated one.
With too many clauses any termsheet becomes a nightmare: it takes away flexibility and disintegrates anything genuine that would have happened.
It also exponentially increases the scarce amount of time both parties should spend negotiating, setting success further out of reach.

Not such a “good deal”

A good deal is fine, a too good deal not so much. Why?
It’s generally too good for the best dealmaker and VCs are the best at it.
Any ‘too good deal’ signed years before has one problem: it is here for everybody to see for ever. It is bad for startups as everybody will see they were taken advantage of, years ago. It is bad for the VC as credibility and reputation are paramount in this industry. They will loose subsequent deals, for a good reason, when their behavior will spread by word of mouth.

Lack of iteration

Steve Blank’s core principle is that “no business plan survives first contact with customers.” So instead of starting with a business plan, develop a set of business hypotheses.
A startup is an iteration process. Be ready to iterate.
Again. And again. And faster.
If you do not have that agility in your system and in your organization, you won’t run a startup, you will run a SME.

Greedy valuations

Maximizing valuations at financing rounds may seem like the logical way to go. It is not. It’s like running a 10km and realizing halfway through that one started too fast: the second half will become a losing proposition.
A higher valuation for any intermediary round will make the next round way harder since any VC expects at least a 3-time valuation bump within 24 months (in the US it can reach 4X within 15 months).
Unless you’re a real superstar, intermediate rounds should be priced slightly below fair value: dilution will be higher but next rounds will be much easier.

Follow-up rounds

VC should be chosen by startups based on their complementarity, expertise, reputation and ability to finance the next round.
Low follow-up percentage in funding is a strong signal that investors are concentrating too early, too much towards their portfolio’s winners.
Your startup might be over in 18 months because other institutions will only participate in your next round if the last round’s historic investors participate at least pro-rata to their previous investment.

Obscure cap table

All stakeholders must contribute to value creation.
Stake should be proportional to one’s contribution whether you are a founder, an employee or an investor.
Founders and follow-on employees should have stock option plans according to their impact and value creation.
“Dead wood”, i.e. stakeholders without active roles should never represent more than 5% individually or more than 15% collectively. “Dead wood” kills startups as no VC will fund startups with too many leechers.

Strategy serving Finance

Finance follows strategy.
Strategy should be thought, discussed and devised before financial considerations. Finance experts will then intervene and propose structures or products that fit the strategy aforementioned.
Failure to listen to the company’s heartbeat will cause financial experts to dictate the rythm. This is a slippery slope as founders should be the architects and financiers the laymen. It is chaos the other way around.

While some of this advice may seem counterintuitive, we’ve seen startups falling time and again because of inherent founder biases and precipitation in making critical decisions. Lightly taken early stage calls can snowball into unsurmountable hurdles further down the road.

I’ll be glad to discuss any of it, reach out at Cenitz.

If you’re an actual European startup looking to close a Seed/Series A stage, make sure to hit us at frederic@cenitz.fr