Over the years, as both a founder and an investor, I’ve witnessed a mix of the great choices and mistakes made by entrepreneurs at the earliest stages of a company’s growth. This year is no different than previous years. Macro-economic forces are always changing, and all founders can do is plan for the worst while they work tirelessly to make the most of the initial capital they secure.
Here are a few things to keep in mind to avoid the common pitfalls I have noticed:
1. When the pitch is over, it’s time to be transparent with your board. Once you close your initial funding, it’s extremely important to be transparent about all the issues your company is facing. Is your VP of Engineering not working out? Maybe the product isn’t where it should be. This is the information your board needs to know. There’s a tendency for entrepreneurs to stay in pitch mode after the money has crossed the wire into their account, but this isn’t necessary. In fact, it can be a huge detriment to a startup’s success. In my experience, when a founder isn’t transparent, it’s the relationship between the investors and the founder that suffers. Over time, this lack of transparency can eventually lead to a failed company. Remember, your investors are your partners. Tell them what keeps you awake at night. Be honest. Time is your enemy with a startup, so tackle any problems early on.
2. Don’t confuse management with leadership. This is probably the biggest lesson that early-stage founders should take to heart. You might think you can handle all of the functional roles a successful company ought to execute on (engineering, marketing, business development, sales, finance, etc.) — but you can’t. Be realistic and hire some great managers to join your team. This will allow you to focus on the bigger picture of company vision, capitalization and hiring. Founders should lead the company — not try to manage every functional role in the company.
3. Plan for capitalization before it’s too late. I’ve found that 50% of the time startups might not be able to execute on plans based on reasons outside of their control – be it the changing competitive landscape, macroeconomic factors or some geo-political disaster that changes the capital markets. The only way to plan for the unknown is to have runway. All too often founders wait too long to start raising money for the next round of capital, and then they end up running the business to the wire (or worse, to the ground). Early stage companies should always have a solid runway of at least six to eight months left in the bank as they start fundraising for the next round. This is imperative to ensure making it through the unknown. The best way to do this is to discuss and plan clear milestones, future capital requirements and runway left at the very first board meeting. Always have a shared understanding with the board on when to raise capital and the proposed state of the business at the time of the next raise.
4. Admit failure when failure’s had. Startups are about learning to fail fast and course correct quickly. Maybe the choices you so enthusiastically convinced the board about didn’t pan out the way you hoped they would. If that’s the case, then fix these and fix them fast. The more agile you are with correcting mistakes, the more ahead of the game you’ll be. In addition to fixing mistakes quickly, it’s also important to not be afraid of making those mistakes. This is how you’ll learn. Follow your passions and your gut. If you execute on your plan and your idea flops, don’t be afraid to admit to the failure, but pick up and move on right away.