The 12 Most Common Startup Mistakes In The Story

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Preparation Focus: Your Company’s Core

The core of the preparations for a financing round is your story. All teams, all startups, and all companies have a story. Part of that is history, and part of it is in the future. Almost anyone will remember a story told much easier than a data dump of revenue and market numbers. The focus of the preparations is therefore first and foremost the story, the core of the company, and what it is all about. The story will provide you with the setting for all preparations, from the small things (give me the elevator pitch) all the way to the operational financials for the coming 18 months. Once you have the story, you can focus on the tangible data that investors like to see – the ones that are relevant and pertinent to your story. Don’t ruin a good story with bad data, so watch these 12 most common startup mistakes:

1. Unrealistic Growth Projections. 

Founders and investors know that financial projections of early-stage companies do not make sense. There are too many variables, unknowns and future events that make the projection inaccurate 99% of the time. That said, a projection helps an investor understand how you think about your business and what are the assumptions that need to hold true for the proposed venture to grow. If you project a revenue growth that is completely out of sync with other startups in the industry, it brings out your lack of understanding of the space.

2. Not Using Generally Accepted Accounting Principles. 

Financials should be simple and straight forward based on the general accepted accounting principles (GAAP). Presenting financials that turn out to be “doctored” (or “normalized”, an often-used euphemism) are an immediate red flag to any investor and most likely a reason for terminating the discussion.

3. Not Doing a Cash Flow Analysis. 

Creating a solid revenue projection, nicely integrated with your business plan, but there is no cash flow analysis provides not only an incomplete picture, it demonstrates incomplete thinking by the team. Cash flow analysis provides the aggregation of all financial streams, including when you need to start your next fundraising.

4. Not Knowing Your Comparable Market Metrics. 

When you are betting your company’s future on bringing to market a new product or service, you are expected to understand that market in all its details and be able to reference their own product/service in the metrics that are relevant to that market.

5. Not Knowing Your TAM and SAM. 

Being unable to put metrics on your available market is a near fatal sin. Total Available Market and Serviceable Available Market are standard concepts that provide not only an idea about what you are after, but also an idea about what is feasible in terms of growth. It allows a first level of reference for the company’s ambition.

6. Unreasonable TAM. 

It is important to understand the difference between the Market Size and the Total Addressable Market. Investors are reasonably aware whether a market is large enough or not. If you present a TAM that is unreasonable for the industry, it can boomerang and showcase your lack of experience.

7. A Top-Down only Approach to Market Sizing. 

Assume that, as per Nielsen, ‘delivering breakfast to the office’ has a market size of $100 MM. While Nielsen could be correct in their calculation, you cannot use this as the only measure of market size. Bottoms up is a better approach to paint the picture of sizable opportunity. “If there are 1 million office goers in the city, and you can attract 5% of them, you will profit $1,000 a month and if you deliver breakfast 20 days a month, that is $20,000.” This bottoms up approach to market sizing is what makes the cut and shows the true potential of your market.

8. Fake Precision for Early-Stage Companies. 

As an early-stage company, please admit if you don’t have enough data to measure metrics like CAC, LTV, % churn. Don’t try to convince investors with amazing metrics, for example 20X CAC to LTV ratio. Provide metrics with the right settings, including estimations based on comparable markets and/or companies. Do have metrics though as without metrics you operate in the dark. VCs do want to know that you have thought about your key metrics, even though you do not have the historical data to provide them in an accurate setting.

9. Uninteresting or Unrealistic Projections. 

Projecting $5 MM revenue in 5 years will not excite any investor. Also, projecting $500 MM in 3 years will get you laughed out of the room if you are at zero revenue today. Avoid assumptions that you won’t be able to justify, like 500% growth in revenue with only 30% increase in operating & marketing costs.

10. Lack of Understanding of CAC and LTV of Your Customer. 

Be ready for questions on your user acquisition costs like what channels will you use to acquire a customer, what costs will you incur, what will be their likely lifetime value. Which areas show most promise with marketing, what is your typical sales cycle duration. Lack of answers for these questions mean that you have not thought through your business plan.

11. Not Capitalizing on Your Intellectual Property.  

Investors put heavy premium on intellectual property. Be ready for questions on what IP does your company have and how was it developed, whether any previous employer of your cofounders can have a claim on your IP.

12. Lack of Direction and Long-Term Strategy.

You need to have a clear strategy of where your company will be in 5 years and how you are going to get there. Unrealistic expectations, naïve assumptions will not help you in closing this round.

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