5 Biggest Mistakes of Early-Stage Startups
People often ask me about the story of Coupa and how it became a multi-billion dollar company. Some people assume that it must have been a rocket ship from day one. It wasn’t. Others assume we must have made every right decision in the book. We didn’t. What I like to say is that we saw a big market opportunity, made a number of good decisions, and executed well. Just as important, we didn’t make any truly bad/costly decisions.
In my advising business, I’ve met over 100 startups in the last couple years. From those discussions and my own experience, I’ve compiled my list of the Top 5 Mistakes of Early-Stage Startups.
1 | Fail To Talk to The Customer
This one seems obvious, but I can’t overemphasize how many early-stage startups get a failing grade here. Founders get an idea, talk to a couple buddies who work in the space, and start building. Most likely, they soon find themselves wondering why they can’t get more than a handful of early customers.
A smart founder will have a wealth of conversations with decision-makers or influencers at companies that may be in her target market. She will ask plenty of open-ended questions about a “pain” in the focus area. She will listen, take copious notes, and look for patterns.
I’ll have future blog posts on this topic because it is so important, but here I’ll give you some snippets from my Coupa experience. My co-founder Dave and I had run a similar product area during our years at Oracle. He probably had 10 years of experience in the space and I had 6-plus years. We had deep knowledge, but that is not enough. I spent a couple months finding, pleading for time, and then having conversations with key procurement leaders across a broad number of industries. Over 40 in-depth conversations plus follow-ups were completed before we coded a single line. We understood their pains, we recognized where their priorities were, we tested concepts, we zeroed in on and ruled out certain markets, and more.
You cannot short-circuit this step. Your message won’t resonate with prospects, your product won’t fit, and you’ll flail in answering questions from potential investors.
2 | Underprice Their Solution
Pricing is an under-appreciated aspect of startups, but it can be one that delays your progress, or quickly kills it. In my experience, B2B startups often underprice their offering. There are many reasons they do, but let me focus on the outcomes of underpricing. On the positive side, if you underprice, you’ll get more logos in the short-term, but the other side of the ledger is larger and problematic.
The four undesirable effects of underpricing are:
1. You will struggle for meaningful revenue. This likely needs no further explanation.
2. You will gain less attention from your actual customers. You want to be an important solution for your early customers. You want them to sing your praises and recommend you to others. If a customer is paying you $100K annually for your SaaS solution, it’s important to them. They are making a real investment and will put the right players on the project. You’ve got their attention. If a customer is throwing $10K annually for it, they may have snuck it under some procurement rules. It’s a nice-to-have and may not get the focus it needs.
3. You will decrease your stickiness. They say that B2B apps tend to be sticky. That’s true, except in two circumstances. First, if the app was never put into production or rolled out to a wide number of users. And second, if you ask for a significant price increase. Nothing is sticky when the customer values the solution at $10K, and then can’t explain why the new price is $75K.
4. Underpricing your offering attracts the wrong type of sales people. It’s uncommon to have a B2B offering that is marketing-driven, i.e., prospects come to your site, learn, and buy with little to no sales involvement. Most B2B offerings require some form of sales outreach. On the people front, good sales people are financially driven. They’ll look for opportunities to sell at a high price point. That’s how they make their numbers.
All four of these aspects can hurt your ability to fundraise, which means your flywheel won’t start spinning.
A confession: We didn’t do this well at Coupa early on. We went for logos and significantly underpriced. It’s hard to quantify precisely, but I would say this cost us 12–24 months and a decent amount of equity.
3 | Too Slow to Follow-Up
Most startups are formed by techies who like things they can control. Coding, for the most part, is controllable with a single path. If they control the input (time/effort), then the output (solution) will be realized. Most of the rest of an early-stage startup doesn’t work that way. As a founder, you need to have target market / prospect conversations, you need to work with customers to implement, you need to hire, and you need to fundraise. These are are asynchronous communications requiring multiple threads, inevitable obstacles, and ability to influence others.
My experience shows that techie founders are pretty good at the initial outreach. But eventually something doesn’t go to plan and the engine grinds to a halt. Let me give you an actual example. I was advising a young startup where the CEO was off-the-chart smart. He and the team had built a pretty compelling product, and in one of our early meetings, he excitedly told me about a great sales meeting he just came from. He was ready to forecast a big opportunity. I asked what the next steps were and he promised to follow-up right away with his key contact to articulate them. But, fast forward a few weeks later to our next meeting in which this CEO informed me that he’d sent a single email to his contact but never heard back. He didn’t call, he didn’t send numerous follow-up emails, he didn’t push. Now, the momentum was gone, and the deal was lost. I’ve yet to find a startup that failed because the founders were too pushy, but I’ve seen many flounder because the leadership was too passive.
4 | Underperform in Fundraising
I’m not going to shock anyone by saying that fundraising is difficult and takes more time than expected. Fundraising requires the right inputs, the right plan, the right effort and follow-up, and the right attitude. And a $750K seed round requires the same effort and thoughtfulness as a multi-million dollar venture round. Of course, you need a good deck with the right story/message (no business plan, please!). You’ll want some level of a financial model and a strong set of backup slides to show your understanding of the pain you are solving, the market opportunity, your go-to-market approach, and your use of funds, etc. On the planning side, you must pick the right set of investors likely to be attracted to your deal. A firm with a $1B current fund isn’t going to invest in a $500K round. Likewise, you can’t easily raise $4M from friends and family. Also, a biotech VC won’t often (or ever) do an enterprise apps deal. Once you have a good set of potential investors, treat it like a sales funnel. Reach out, have early meetings over coffee, follow-up quickly on questions, and when you are ready, ask for concrete steps to a term sheet. Lastly, attitude does play a part. Be confident without being arrogant. Investors know that confidence will help you in customer conversations and hiring early employees. If you aren’t confident here, you won’t be successful out there.
5 | Accelerate Without Intent
This one might be a little controversial. Accelerators are popular. Whether it is YCombinator, 500 Startups, Techstars, Angelpad, Alchemist or one of the many others, you can find an accelerator that will accept you. It’s a nice ego stroke when you get the acceptance. They all have several great success stories, but is it the right path for you? Think about who you are, where you are in the startup process, what you need, and what you are willing to give up. If everything aligns nicely with the accelerator, go for it. But let’s look at a case where it might not. Imagine you are a team of 4 people in Omaha. You’ve raised enough money to last you a year at current run rate, and you expect to have your beta ready in two months. Your target market is oil and gas companies. What are the things you need at this point and do those needs really fit with what the accelerator offers? The accelerator folks may bring big enterprise sales experience, but do they understand oil and gas and have good contacts? They have a great demo day in 3 months, but you’ll just be deploying your first customers at that time, so your focus should be there. They are located in Silicon Valley, which brings you into a great tech network, but away from your customers and your team (and increases your burn). Given what you need, ask yourself if that accelerator will truly increase your chances of success.
These are my Top 5 mistakes of early-stage startups. Yours might be different. Please feel free to comment. What did I miss? Where am I mistaken?
And early-stage startups are welcome to signup for a free exploratory discussion about their business. We’re in San Francisco on most Tuesdays and Menlo Park on Wednesdays. This week is all full, but there are spots open for next week.
