Mistakes At The Start When Creating A New Startup

When discussing the mistakes made during the initial stages of a startup, one can see that most of them are not related to the specific (technology) focus of the startup. Most of the mistakes are related to areas such as the market, the potential customers, the financing, the timeline etc. Deep-tech startups have as the main thread the technology content, and this is what has been the focus of the founding team. Only when arriving at a (perceived) milestone, does the team look up and think about the “Next Step”.

We would like to break down a number of the common mistakes made during the initial stages of building a startup, as this will help you not only to avoid them but to ensure that you and your team extend the line of sight to include these challenges and deal with them as part of your strategy.

THINKING VCS ARE THE ONLY PLACE TO GET MONEY

When starting a company or looking at the next step, Management Team’s frequently think the only place to get money are the venture capitalists. Depending on the type of startup, the stage it is in and the step it wants to make there are usually at least a few alternative financial instruments such as crowdfunding or loans.

START AS A ONE-PERSON TEAM/RUN IT AS A ONE PERSON-TEAM 

Deciding, starting and completing a fundraising path is not a one-person decision nor a one-person effort. Often CEOs will find that the team has to continue focusing on the business and hence will assume the responsibility for the fundraising all or mostly by themselves. Fundraising is a team effort and needs to be executed by the key members of the Management Team. Throughout the preparation process, new ideas will come up, and new questions will be asked. These require full management team attention and interaction. VCs will seldomly invest in a “one-person” team.

FORMULATE AN AMBITION WITHOUT A REALITY CHECK 

Having been confronted with the question of “your ambition” or “your ultimate goals”, teams often resort to a quick “let’s make up some lofty goals” resulting in a revenue target or a market share % but fail to thoroughly validate the target(s). VCs are smart and have associates that will dig out market data and have access to market research reports and databases. In addition, they see many deals being in similar and/or overlapping areas as your proposition. Building a story with silly ambitions will have your story end up in the circular filing cabinet quickly.

When presenting your startup, you need to make sure that you did not promise something that you are not completely sure of and that you haven’t “verified” with respect to targets and execution. As a team, you need to ensure that you can not only state your ambition, but also the intermediate points (KPIs) that mark the road to fulfilling that ambition.

NOT THINKING THROUGH THE COMPLETE FINANCIAL ROAD 

 The famous last line “this will be the only investment round we need – after this our business we will be cash-flow positive and not need any venture capital anymore”. VCs hear that line frequently. Their first conclusion is that the management team has either not done a complete financial analysis or does not have sufficient ambition, or does not need venture capital but a simple credit line. Hence, do not look at “just getting in the money for the next round” but think ambition! As a team you need to understand what it will take to get the company to fulfill its ambition (and it is seldomly a single investment round).

In a previous post, we talked about common mistakes made at the initial stages of creating a startup. In this post, we will add to the list of common mistakes. Avoiding these you can successfully move to the next stages of the startup’s life.

START WITHOUT SUFFICIENT FINANCIAL RUNWAY 

Any financing process will take time; most financing processes will encounter a delay, sometimes short, sometimes long. Sometimes delays are due to bad planning (forgot about the Christmas vacation period?). Sometimes they are due to unforeseen business challenges (a new competitor suddenly appearing with a better product or service, etc.). Sometimes they are due because based on the preparations, you have decided to change your business model or pivot the company. Starting a fundraising process because “we’re running out of cash soon” is a recipe for disaster. For any fundraising process, reserve at least six months. That assumes that you’re ready to roll, e.g., the essential components are present and verified.

START WITHOUT A PLAN B 

Never assume that the fundraising will be successful or complete in your planned/allotted time; always have a plan B at hand. A plan B could be a strategic customer, a bridging loan, or an R&D grant application. Ensure realistic checkpoints and sufficient time to move Plan B into Plan A if and when necessary.

PREPARING FOR A SPRINT WHEN IT IS A MARATHON 

Sometimes teams have had early contact with VCs and interpreted feedback as “we’re ready to invest, tell us how much you need” … This has led to the assumption that getting to the most important point—MIB or Money in the Bank—is going to be a walk in the park. It almost never is. Don’t assume you can get your venture round done in a few months, even when VCs will confirm that they can work fast and “have done a round in two months’ time…”.

START WITHOUT SETTING LONG TERM GOALS 

Don’t just get money for the next step without thinking about the full journey. No one is going to give you money for an incomplete story. Your long term goals are essential to the fundraising process and cannot be dismissed with a bit of handwaving and a vague “we’ll see where we are after this step”….

A 2X IMPROVEMENT IS ENOUGH  

Assuming that a 2x improvement in speed will make the whole world use your product is a major if not fatal underestimation of what it takes to get customers to buy or license your proposition. The person making the purchase decision will think twice to disrupt his well-oiled operation because something is going to be a bit faster or a bit lighter. His or her reputation, salary and job is based on a smooth operation and your product or service has to offer a lot more before he/she is going to risk anything. Think 10x to ensure that the right people will listen to you and consider your product/service…

THINKING VALUATION IS THE MOST IMPORTANT OBJECTIVE  

Going into the process with valuation at the top of your list is a frequent habit – “how much can we get against how much equity we’re going to lose”. Early on in a startup’s life valuation is not the first item on the list, there are many more rounds to follow and when you are hitting Series C the valuation game becomes the first priority. However, at Seed and series A valuation is not the first concern, bringing the right investors on board is. High valuations at an early stage create barriers for others to come aboard.

MISMATCH BETWEEN EXPECTATIONS AND REALITIES  

You only need US$200K, so you’re setting up a full VC funding run not realizing that most if not all VCs will not be interested in such a small sum. Search for money in the right places: if you need an angel round, your process is looking completely different from a regular VC round.

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