Why would anyone become an entrepreneur?
As a CFO for a Venture Capital (VC) fund, I work with startups every day run by entrepreneurs who sacrifice everything in their pursuit of fixing something that they are unhappy with in the world.
They are filled with enthusiasm and energy, working ungodly hours in their endless desire to change the status quo to something better. It’s a noble pursuit — of that there is no doubt — but it is also a hard, lonely, and difficult one.
In my years working for a VC fund, I have worked with over 800 startups in many different sectors. Unfortunately the majority of these companies will fail, returning nothing to their investors, costing people their jobs and shattering the dreams of many founders along the way. Yet every year we invest into another 150 new companies filled with new founders all trying to do similar things.
The purpose of this article is to try and share some common errors that I see, many of which could have been easily avoided, or which could have been anticipated and prevented.
Running a startup is really hard — doing it for the first time is exceptionally so and will be filled with errors and things that you wish you never did. The trick is to learn from these mistakes and become more experienced so that they do not happen again in the future.
The most important attribute that I have seen in a successful entrepreneur is resilience and the ability to bounce back from setbacks stronger and wiser.
Having a positive attitude, and finding the positivity even in moments of disaster can build resilience along with the ability to weather the many inevitable storms that will come.
I hope that knowing how to avoid the following common errors can help you on your journey as an entrepreneur:
1. Not aligning as founders
Investing at the earliest stage, I see many teams implode due to a lack of founder alignment. Sitting down at the very beginning as a founding team to discuss your vision for the company, everyone’s role within the operation of the company, and the equity split can save a lot of these problems. You should also be putting simple things such as share vesting, financial controls, short policies and procedures in place to ensure that there is clarity, fairness, information sharing and a shared common vision in your company.
To this end we ask all of our teams to sign a simple short form founders agreement that detail many of these things upon their acceptance to all of our accelerator programs. It has helped many companies to resolve early disputes amicably and with the best interests of the company to the forefront as opposed to any one founder.
2. Not knowing your finances
There is nobody alive that enjoys accounting (I say this as a 20+ years qualified accountant). Unfortunately for you as a founder you need to understand the finances of your business. Yes, you personally.
Luckily there is nobody born as an accountant. Understanding finances is a learned skill that anyone can do.
The easiest time to begin is when you are starting; the numbers and transactions are relatively small and should be easy to track (along with the other million jobs you have to do).
Accounting is like a muscle — the more you practice, the stronger it becomes. Start with a very simple spreadsheet or accounting package (e.g. Xero, Quickbooks,etc). At the end of the month assess this versus what actually did happen, and figure out why the two numbers could be different.
Use this learning to prepare next month’s projections. Sit down as a team and discuss the numbers, what you didn’t anticipate, what is going to happen next month, what might be delayed, how much cash you’ve got, and how long it will last you.
Like it or not, cash is going to be the lifeblood of your business, and understanding it gives you a huge chance of succeeding (or surviving).
3. Not aligning your spending with what you want to achieve
Many years ago we invested into a company that raised significant finance. A few years after our first investment they ran into cash-flow problems. I spent a week in their offices as we considered a further funding round and did some work on their finances with the CEO. What we discovered was that they did not track their spending sufficiently or align any of it with the KPIs of the company.
Many of the payments coming from their bank account were historic things that they signed up for that they thought they had stopped, they had no in-house financial person (they paid an accounting firm to produce financials that nobody could read), they never looked at their variance reports or assessed any spending campaign to see it if met the objectives they wanted, and many of their staff were on compensation packages that were not in line with what they wanted them to achieve.
At the end of the week they recruited an in-house accountant, they changed staff compensation to align it with their role, and they ceased non-effective spending — so we agreed to fund the company further.
Eleven months later they had their first profitable month, and one month after that the company sold for a considerable amount, generating a 4x return for us as well as a great outcome for the founding team and staff.
Some very simple controls, management, oversight, and a great product and team lead to a successful outcome for everyone. A happy ending!
4. Not doing the math before fundraising
Many times when a startup comes to me looking for funding, they present a pitch deck seeking (for example) $1m in investment. Then as part of the deck or associated materials they have financial projections that show they are going to be profitable in three months time, and they only require $100,000 in investment to do so.
This type of uncoordinated approach is going to lose you credibility with investors. If you are going to try and raise finance, you need to know how much money you really need. You also need to be able to explain what you are going to do with this money and where it is going to get you.
As a founder you should try to anticipate the lifecycle of your company, including how much funding you need to get to cash flow breakeven, to profitability, and to a potential exit. What valuations do you need to reach to make this work on an economic basis personally at each stage? Work it back from the end and forward from the beginning to see how it could transpire.
Work on the financial projections for the business. You have a wealth of information at your fingertips about everything. Find out the cost of materials, how much of them you need, where they will come from, the associated costs, what equipment you will need (from where, how much?), and what staff is required (where will they come from, how much do they want to be paid, can you leverage a stock pool?). Look at information from other companies where available, talk to other founders, talk to your advisors, and have your numbers tested.
Your investors will hold you to these numbers, so do your best to make sure they are correct. I have had many awkward conversations with founders seeking further investment as we review their original projections provided a few years prior versus the actual reality of what happened….try to avoid these conversations, as it will test the credibility of the new projections you are providing.
5. Targeting the wrong investors
If you are planning to try and raise investment, then please, do not send cold emails to multiple investors with the same tired pitch deck and their first name and surname possibly spelled incorrectly. You need to spend some time finding investors who invest into someone like you!
With platforms like Crunchbase, Pitchbook, Prequin and others, you can now research many investors online. Be specific with why you are reaching out to the investor. Speak to some of their other portfolio companies, watch videos of the investor speaking, and read their blog posts. Find out why they would be a good fit for you, and tell them this. Target your pitch and materials at the reasons why you are good fit for them.
Two of the best stories of investment in our portfolio came with this approach.
One portfolio company had a meeting with a famous Silicon Valley investor and spent time researching them and their approach. They learned that the investor had a condition which meant they couldn’t eat apples (that they loved) so they spent some time tailoring their product to be apple flavored for the pitch. They walked out with an enormous cheque!
Another portfolio company had been rejected by one of our partners for an investment meeting. This partner also had his own company at the time, which was a Ridesharing app, so the founder booked a trip with him on the app and spent the three-hour drive pitching him the company. The founder ended the journey with a substantial cheque.
Spend time working out who invests into companies like you, in the right sector, with the right cheque size, stage, etc. Then spend time deciding how you should meet them. Find the warm introduction and then tell them why they are a good fit for you. Don’t blindly waste time spamming every investor you can find — target the right ones properly.
6. Not educating yourself on investment types, terms, and conditions
We live in a day of having an infinite amount of information at our fingertips. Founders of companies need to spend time reading up on investment legalese and terms.
There are multiple good sources of information on the common deal terms and their effects e.g. askthevc.com , Quora, TechCrunch, etc. At the end of the day every single economic term in the investment documents will have an impact on your equity holding and final economic outcome (good or bad), so it is worth reading up on the terms.
Looking at a standard set of investment documents (seriesseed.com or nvca.comboth have standard sets), they may seem daunting and complicated, but in reality there is a lot of repetition and there are only 5–10 actual important terms in there around economics and control.
Learn what is standard at your stage (Cooley LLP did a good survey of US investments recently at cooleygo.com/trends), and negotiate with that in mind. Also make sure you hire an attorney that is experienced at your investment stage and reasonably priced.
I hear so often of attorneys that are not experienced at the specific stage of investment who delay deals and overcharge. Find someone with relevant experience; agree to a reasonable fee upfront so they will focus on what is important instead of running up the hourly bill.
Also get used to modeling your capitalization table for different scenarios. Include all convertible instruments and different scenarios for conversion. I see some startups stacking convertible debt and then being shocked in an equity round when almost all of their company disappears!
I had one example recently of a company raising a Series A round at a reasonable valuation, and once the stack of debt converted the three founders ended up below five percent of the total company. Do not let this happen to you. If you are happy with the valuation and it is for a decent amount of money (>$650,000), then price the round and fix the equity dilution for certain.
Being an entrepreneur is hard, really hard — but in my time working for a VC fund I have seen many entrepreneurs become exceptionally wealthy, much more than I could ever hope to be.
I have seen people invent amazing products — products that become household names and change peoples’ lives.
I have seen people address some of the biggest challenges in the world, and fix problems that had previously been thought to be impossible.
I have worked and am working with people who are now creating solutions to some of the world’s biggest problems such as overpopulation, world hunger, Alzheimer’s, cancer, and many many more. These are problems that have touched everyone in the world and will continue to affect the way we all live our lives.
Imagine being the person that solves these problems and creates a better world for all of its inhabitants.
That is why people become entrepreneurs.
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