After reviewing over 9,000 business pitches in the last decade, and investing in more than 50 companies, I’ve seen my fair share of failures and successes.
Some of the most notable were sold to IBM and Facebook, with one currently going for an IPO in NASDAQ, but, as with all venture capitalists, I have also witnessed many of the companies that I have invested in fail.
With that experience in mind, I’ve realised that there is an eight-point list that covers the key reasons that start-ups do fail, and are therefore mistakes that would-be entrepreneurs should avoid at all costs.
1. Being unprepared for the work of an entrepreneur
Many people think of building their own company, but don’t understand what it means to be an entrepreneur. Being an entrepreneur is not an easy or ‘fun’ job. It means trying to achieve your vision without twisting your perception of reality.
You can’t assume the idea will go viral; it may or may not happen. You can’t assume the market may be there, because it might not be. And you’re going to need to be prepared to change your original idea, because in execution it will probably need to be adjusted.
2. Getting the team wrong
When I see start-ups at pre-seed stage, (or as I call it, the ‘two people and a dog stage’), there’s usually no technology, no market and no product. The determining factor for the quality of the idea is the quality of the founding team.
Having a single person on the ‘team’ is typically a bad choice: who will be there to support you in the downslope of that emotional rollercoaster ride?
On the other hand, four or five entrepreneurs are usually too many, especially when you realize that by the time you exit you may be left with three or four per cent of the company for your efforts.
Generally I believe that two or three entrepreneurs is a good team size, especially when the co-founders have complementing skills (tech, business, marketing/user experience, etc.)
3. Making bad early recruitment decisions
When it comes to recruiting your first top talent, it would be very unfortunate if you ‘settled’, and yet that’s what a lot of failed start-ups have done. Don’t be afraid to hire people who are smart, and know how to do things you don’t; actually, that’s exactly why you hire them.
However, while you need the best talent, don’t hire people who are not team player, arrogant or dishonest. Start-ups are too small to be able to manage a bad apple.
4. Not paying enough attention to the environment
When I write ‘environment,’ I am referring to the people around the start-up, whether they are consultants, friendly advisors, suppliers and service providers. These people have standards of their own, and if they are low, your company’s team will be pulled down as well.
I always recommend that start-ups only work with professionals with a high standard of work ethics, who demand the best of themselves, and who enrich the start-up with their wealth of experience.
Speaker Jim Rohn said once, “You are the average of the five people you spend the most time with”.
Too many start-ups, either cutting corners to save money or simply unaware of alternatives, surround themselves with partners and alliances that drag their ‘average’ right down.
5. Thinking too small
Second only to choosing the wrong co-founder, the only mistake that’s almost impossible to correct once made is in going after the wrong market in the wrong way.
Not long after Pierre Omidyar began to write the original computer code for an online venue to enable the listing of a direct person-to-person auction for collectible items, he tested it with something remarkably more mundane than that; a broken laser pointer. The business exploded as correspondents began to register trade goods of an unimaginable variety.
That was the beginning of eBay.
To entrepreneurs I suggest that they look for a problem that is as yet unsolved, rather than try to create a mutation of an existing product. Successful startups seek to disrupt rather than improve, and try to restructure an industry rather than provide an add-on feature to it.
6. Falling into the ‘average customer’ trap
We love short-cuts, and that’s why start-ups often fall for the ‘average customer’ trap: the non-existent, imaginary person that exists in the world in great numbers and who is simply waiting for a product to come and resolve all their problems en masse.
To avoid falling down this well, you need to think of not one ‘average’ customer, but rather four to six more specific prospective buyer personas that might be interested in your product.
These demographics should exist in the world… you should be able to find them in real life. Your goal is to understand what’s bothering them, even if they don’t know it.
Then, focus on just one of them.
7. Having too little cash (or too much of it)
One of the most common tips I give to entrepreneurs is “don’t stay without cash”. But another piece of advice I pass on is “too much cash can kill you”.
The reasoning behind the first one is obvious: no cash, no business, so entrepreneurs should always be on the lookout for raising capital.
The second piece of advice is trickier to understand, but it points to the fact that when you take someone’s money, you also take his or her opinions (like it or not).
If you don’t like their ideas, expectations and notions about how to spend the money and run the company, don’t take the money. Customers and employees aren’t the only ones needing management – investors need to be managed as well.
A third advice piece of advice about money is to be frugal.
Lower your cash burn rate as much as you can without killing the startup’s fire and need for investment. If you respect your cash, then your investors will respect you.
Too many entrepreneurs and start-ups fail because they don’t understand how to use investor money, and how to manage the investors once they’re on board.
8. Lack of commitment
If you’re going to do it, do it like you mean it. Only start something if you are truly passionate about it as it can take anywhere from one to 10 years to make your dream come true – so please make sure it’s your dream.
Don’t go for the money. Don’t do it because it’s cool. Do it because you want to change something in this world – the bigger, the better. You would not believe how many aspiring entrepreneurs try to start up a business for the wrong reasons, and then burn out far too early and the business ultimately fails as a result.
Andrey Shirben is a Founding Partner at Follow[the]Seed