6 Costly Mistakes to Avoid as a First-Time Entrepreneur
Building a successful startup is no easy feat.
Many established entrepreneurs launch several failed businesses before finally creating a company that scales and turns a profit.
Part of the reason for this is the fact that first-time founders often make certain key mistakes that harm their businesses.
One vital aspect of attaining this knowledge involves developing an understanding of the most common mistakes that first-time entrepreneurs make.
I want to highlight 6 crucial errors you should avoid as a new founder to potentially increase your chances of launching and sustaining a successful startup.
1. The “Famine Mentality”
The conventional wisdom is that once a founder comes up with a “game-changing” idea then it’s only a matter of time and details until he/she starts making millions of dollars.
This vision encourages many founders to be ultra secretive about their ideas.
Worrying that if they share any of their thoughts or plans with others then somebody else is bound to steal them, novice entrepreneurs often keep their ideas “close to their chests”.
This is an example of the “famine mentality” whereby one believes that the only way for person A to succeed is to do so at the expense of persons B, C, and D (i.e., the world as a “zero-sum game”).
However, keeping your idea a secret is the exact opposite approach that you should pursue as the founder of a new company.
I recently explained why this is so:
“Other entrepreneurs are the very people with whom you should be sharing your ideas… You need feedback, lots of feedback. So why not get it from those with a demonstrated ability to bring their ideas from inception to market to profit?
Sharing your ideas with others makes it possible for competent and experienced people to point you in the right direction, to provide you with crucial tips, and to connect you with others willing to help and/or get you customers. This is what entrepreneurs do for each other. Ours is a sharing culture, not one based on the famine mentality…
Besides, nobody is going to be interested in your idea before you’ve proven its potential… However, once you prove your naysayers otherwise, there won’t be any point in hiding your idea any longer because everyone will already know about it.”
Thus, refusing to share your ideas with others is deeply misguided not only because you’re robbing yourself of endless resources of people willing and able to help you execute on your goals but also because the world (including your competitors) will already be quite familiar with your idea by the time you’ve brought your product to market.
There’s also the fact (see 1, 2, 3) that many of the most successful startups ever — including Facebook, Instagram, PayPal, Shopify, Twitter, and YouTube — pivoted from their original ideas to the highly lucrative products/services on which they are based today.
Finally, ideas are far less important than effective execution when it comes to transforming a potentially great idea into a hugely successful business.
And a crucial part of effective execution is going beyond discovering, to actually testing, the product idea.
So, don’t waste your time keeping your ideas tucked away in a safe hiding spot…unless you actually want nobody, including your potential customers, to ever see them.
2. Under-Valuing or Misunderstanding the Importance of “Cash Flow”
A popular study undertaken by CB Insights suggests that nearly 1 out of every 3 startups fails because it runs out of cash.
With exception of trying to sell a product for which sufficient market demand doesn’t exist, having inadequate cash to continue operations is the second most common cause of all startup failures.
As a new startup founder you must therefore develop a solid understanding of a wide range of economic principles if you intend your company to survive and thrive.
“Cash flow” is a key concept about which many novice entrepreneurs often seem confused.
Investopedia provides a rather technical definition of “positive” and “negative” cash flow:
“Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing.”
In simpler language:
- Positive cash flow: when the amount of money coming into your business exceeds the amount going out, i.e., accumulating money
- Negative cash flow: when the amount of money coming into your business falls short of the amount going out, i.e., losing money
Novice entrepreneurs often misunderstand the dynamics of and how to properly manage cash flow.
The reality is that startups begin “burning cash” from day one, i.e., every second of every day costs you money to operate.
This means, for instance, that it’s entirely possible to have a “booming” business but still be cash flow negative:
- You’ve begun selling your product;
- Your customer base is growing substantially; and
- Your long-term sales potential is massive.
- You’ve taken on lots of debt in order to reach this point (i.e., to hire your employees, develop your MVP, market your product, etc.); and
- Your monthly expenses (e.g., rent, payroll, etc.) surpass the amount of revenue you’re generating.
- If you don’t start bringing in more money than you’re spending then you’re going to run out of cash and be forced to close shop.
All prudent entrepreneurs should regularly practice cash flow forecasting (otherwise known as cash flow projection).
Cash flow forecasting is a projection technique used to determine the “financial health” of your business.
As the U.S. Small Business Administration explains:
“Forecasting gives you a clear look at when money comes in, when it goes out and what money you are left with at the end of each month after you have paid your expenses and recorded your income. Knowing your numbers in terms of cash flow projection allows you to see potential pitfalls within the cash-in and cash-out flow of your business.”
Forecasting, therefore, is crucial to ensuring that your startup doesn’t burn money at a rate faster than what you need in order to stay in business.
Stay on top of your cash flow and you’ll be far more likely to succeed than if you spend recklessly.
3. Building a Product for Everyone
Novice founders frequently assume that successful startups build products exclusively with mass appeal.
Seeking to create something that the entire world wants, amateur entrepreneurs might then commit to endlessly changing their product concepts and adding supplementary features in an effort to draw in more and more consumers.
However, as I recently explained, this approach is seriously mistaken:
“Novice founders sometimes try to create something bigger and better than Facebook by attempting to launch their products into a mass market, all the while forgetting that Mark Zuckerberg and his colleagues never actually targeted any kind of mass market in the first place. Instead, Facebook sought to win over Ivy League students — a niche market.
Indeed, the best products are often those that begin by focusing on winning over the hearts of a small number of users and only then expanding into further domains.
Apple targeted tech geeks and ‘hispters’ with its iPhone; Tesla went after high-net-worth tech enthusiasts; and Pinterest started so small that it held in-person meet-ups with most of its users in its early days.”
Against the conventional wisdom suggesting that the key to building a successful business is to create something with demand in dozens of different industries, it’s important for you to recognize that:
The mainstream market is often a cemetery for startups, especially for those operating in the technology sectors.
Mainstream customers typically don’t have confidence in new technologies: they’re searching for security, dependability, and brand status whereas startups are often glitchy, unfamiliar, and rather untested.
As a startup founder, you must concentrate your efforts on the early market — not the mainstream market:
The above image is a famous diagram based on the work of Geoffrey Moore, author of Crossing the Chasm.
Building on earlier research by Everett Rogers — which shows that disruptive technology products are typically adopted in different ways by different kinds of people, i.e., innovators, early adopters, early majority, late majority, and laggards — Moore argues that startups must target the early adopter market before attempting to “cross the chasm” and seek out success in the mainstream markets.
As a novice entrepreneur, your goal should be:
- to fix the bugs in your software,
- respond to the concerns (and win over the hearts!) of your early users,
- and steadily build your brand recognition before trying to go after the family of 5 walking out of a shopping centre or a middle-aged woman on her way to yoga class.
Essentially, you need to target the innovators and early adopters, i.e., those who are drawn to novelty, who take risks, who are keen to embrace new designs and technologies, and who thereby serve as a fantastic source of feedback for your product.
This is exactly what Apple, Facebook, and Google all did. None of these companies targeted mainstream markets in their early days — and neither should you until the time is right.
4. Lacking Focus, Getting Distracted
Failed startups often share something crucial in common: their founders eventually lose focus, becoming too distracted by “what could we do?” questions in order to adequately concentrate on and solve “what must we do?” questions.
Insisting that “the underlying cause is usually lack of focus” even when a startup becomes insolvent due to lack of money, Y Combinator co-founder, Paul Graham, suggests that “the single most important thing for startups to do is to focus”.
As a new founder you must maintain focus by dedicating your time and energy to the things that matter most, i.e., researching your market and getting to know your customers, designing your minimum viable product, growing, and scaling.
You need to be aware of the likelihood that virtually endless possibilities will materialize over time as you interact with other founders, engage with your customers, and begin launching your product.
This in-and-of-itself isn’t necessarily a bad thing but the danger comes when you allow yourself to dilute your focus by trying to pursue too many opportunities at the same time or simply getting distracted by the fun and excitement of entrepreneurial life.
For instance, unless you’re actively seeking to raise funds for your company, i.e., this is the specific focus of your startup right now, then you shouldn’t excuse yourself from an evening’s worth of work in order to have dinner-drinks with investors simply because the latter have asked to meet with you.
More practically, consider the actions of Steve Jobs at Apple.
Why is it that the world’s largest company ever sells only 3 products, i.e., iPhones, iPads, and Macs/Macbooks? (Yes, Apple has expanded its product range in recent years but you get the point).
When Steve Jobs returned to Apple, the company was selling many different kinds of products — e.g., printers, PDAs, game consoles, etc. — but Jobs killed all of them to focus on only one notebook and one personal computer.
Building a successful startup is extremely difficult and time-consuming: do yourself a favour and commit to remaining focused throughout your journey, especially when a bit of money starts to roll in and apparently “bigger and better” opportunities start popping up.
5. Confusing Failing, “Failing Fast”, and Quitting
With the arrival of Eric Ries’ “lean startup methodology”, a new philosophy on failure began washing over Silicon Valley and has subsequently spread across the Western world.
For at least a few years now, “fail fast, fail often” (FFFO) has been one of the most popular mantras in the startup world.
Given all the controversy surrounding the fail-fast approach — with many apparently now chalking it up to nothing but “hype” — today’s founders should take inspiration from the basic philosophy or key insight behind FFFO rather than concern themselves with the differing perspectives on its exact meaning, application, etc.
Failing fast is neither synonymous with quitting, i.e., giving up on something entirely, or with fatally failing, i.e., utterly destroying or ruining your company.
Failure as such is unplanned and unwanted. It shouldn’t be fetishized; it should be avoided.
Unsurprisingly, many new founders are terrified of failure.
This fear takes various forms, one of the most common being the adoption of perfectionistic attitudes and behaviours.
Novice entrepreneurs spend far too much time creating business cards, logos, writing and revising business plans, adding features to and tinkering with their products, etc. — all done in an effort, whether conscious or not, to delay the moment of truth when they finally launch their solutions and witness how the markets react.
This is an understandable but harmful approach to take: if you’re going to make mistakes — and it’s almost certain that you will — then as an entrepreneur you want to make those mistakes as fast as possible so that you can learn from them and correct your course.
This is what FFFO should be taken to mean.
Essentially, don’t be scared of trying out and, this is what’s most important, testing different kinds of strategies as part of your development, marketing, and launching operations.
Create well-designed pilot projects and use analytics to gather concrete data on how your efforts fare.
When you fail, investigate why and then take corrective action to move your startup in a more effective and informed direction.
Money, time, and energy are only ever wasted if you don’t learn anything valuable from using/applying them.
Instagram, PayPal, Twitter, YouTube, and many others all changed one or more major aspects of their businesses after real-world data showed that certain things simply weren’t working.
True entrepreneurs don’t give up; they design, test, assess, re-test, and pivot.
As a new founder you need to be prepared to fail in the sense of having some (or all) of your assumptions proven false/misguided, and then being forced to adjust course.
But don’t purposely fail merely because you believe that it somehow gives you “credibility” in the startup world.
There’s nothing glamorous about dedicating your entire life and all your resources to something that ultimately dissolves into oblivion.
6. Choosing the Wrong Co-Founders, Not Signing a Shareholders’ Agreement
Disagreements between co-founders often contribute to and/or directly cause startup deaths.
Paul Graham is rather explicit in his insistence that good co-founder relationships underpin successful startups:
“Cofounders are for a startup what location is for real estate. You can change anything about a house except where it is located. In a startup you can change your idea easily, but changing your cofounders is hard. And the success of a startup is almost always a function of its founders.”
Here at Appster we similarly stress to our clients the importance of finding equally passionate and dedicated co-founders, of building solid startup teams, and of creating supportive and authentic team cultures.
For a variety of reasons — including the fact that startups often grow out of existing relationships between friends or colleagues who are very excited/eager to build and execute on something special — many first-time entrepreneurs don’t pay much attention to drafting and signing co-founder agreements.
A co-founders’ agreement is a “contract between the owners (shareholders) of a firm, defining their mutual obligations, privileges, protections, and rights, and usually comprising the firm’s articles of association or bylaws.” source
Now, it’s undeniable that individual human beings often differ greatly from one another.
Some are very risk averse; others are more inclined to take chances. Some like to plan, strategize, and act slowly; others are disposed to “act on a whim” and take “decisive action”.
Some deliver on exactly what they promise to do; others change focus in the middle of a task and deliver something different than originally agreed upon. Some “rise to the occasion” when things get tough; others “buckle under the pressure” and become unreliable.
It’s not too difficult to find horror stories describing awful experiences of some first-time entrepreneurs.
What happens when you and a friend create a company together and unofficially decide to split all earnings 50/50 but then one of you leaves the business after 12 months and the other stays on to build your startup into a massively profitable venture?
Does the one who left still get 50% of all the earnings? How will the decision be enforced, one way or another, in the absence of a formal agreement?
Or take the case of Zipcar: a rift between the company’s two co-founders ended up in one co-founder taking on all the risk, leaving her job, and working up to 100 hours each week whilst the other never left her full-time job as an academic and put in less than half the number of hours but still kept an equal share of the company.
Let these anecdotes be a warning sign: as a new founder, it’s crucial that you take the time to properly draft and sign a co-founders’/shareholders’ agreement.
Doing so is necessary for at least two key reasons:
- It allows you and your partners to establish clear and equitable guidelines re: who is responsible for what and how many shares of the company each person gets; and
- It creates a framework through which official and enforceable action can be taken in the unfortunate event that your relationship sours and/or your startup ultimately shuts down.
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Originally published at http://www.appsterhq.com