Most great startup ideas come from brilliant people who haven’t previously built a startup or run a company. As a result, startup founders often run into one or more common pitfalls that can dramatically slow down their company. I’ve never been a founder, but I’m now at my fifth early-stage software company, and I’ve seen the way that committing or avoiding these common mistakes can dramatically impact the success of the company down the road.
- Handshake Deals
In the early days of turning an idea into a successful company, founders are understandably focused on survival and often don’t spend the time and money to make sure they’ve buttoned things up formally with people like co-founders, investors and early employees. Once your startup begins to take off, and it becomes apparent the company will become valuable, handshake deals and verbal commitments begin to fall apart. Not only can this ruin relationships, but it can also complicate funding and even an exit strategy.
Saying things like, “I’ll give you 3% of the company” can lead to heartache and perhaps even disaster. These kinds of promises and arrangements need to be analyzed through the lens of, “Will this make sense if we’re successful and the company becomes valuable?” These agreements also need to be properly documented for the sake of clarity and alignment.
- Giving Away Equity Too Easily
This is related to the point above but worth calling out separately. Giving away large tranches of equity is tempting when cash is scarce and the equity is effectively worthless, but if you really believe in yourself and your idea, you shouldn’t give away equity too easily to investors, consultants, employees, or friends and family members.
I’m an advocate of being generous with equity grants for key strategic early employees, but those grants should follow a market-based framework. It’s also critical when taking venture financing to consulting with an experienced attorney who can advise you both legally as well as on what’s currently standard in the market with regard to valuation, structure and terms. You will be well-served by spending the time to find an attorney who specializes in venture financing. In my opinion, this is some of the best money you can spend and could potentially end up saving you millions of dollars or more if your startup succeeds.
- Failure To Focus On A Single Type Of User’s Pain
In the early days of a startup, resources are limited. You can barely meet the needs of one user persona, let alone several, and you definitely won’t be able to execute on multiple products well. Don’t dilute your scarce resources trying to build more than one product or even a single product for more than one type of user/buyer. It can be tempting to sell your product to whoever shows interest, but if you sell to multiple types of buyers/users, you’ll likely end up disappointing all of them. Learn to say no to people who aren’t your target, and definitely don’t build a second product until you’ve nailed your first.
- Focusing On Revenue And Go-To-Market Too Early
Revenue growth is the coin of the realm in venture-backed startups. As a result, early-stage leaders at companies who have raised funding — or hope to — start focusing on growing revenue as quickly as possible and begin building go-to-market organizations. This is all fine and good, provided you have done one very important thing: found product-market fit. Are you making something that people want? Are they willing to pay for it? Are they using it and buying more? Does unit economics work? If you can answer yes to the above questions, building a go-to-market team makes all the sense in the world.
If the answer is no to the above questions, spend your time and capital on finding product-market fit. The metrics you should focus on are product customer usage and engagement, and then retention and expansion. This will sometimes require spending valuable development cycles on building analytics within your software to measure usage and engagement. Doing this early is painful, but worthwhile.
Imagine you just opened a doughnut shop and had 100 customers the first day — you’re thrilled. But later, as you’re leaving that night, you see 90 doughnuts in the garage, each with only one bite taken. These customers won’t be coming back. Time to change your recipe. Measuring usage and engagement will help you understand how many bites of the doughnut your users are taking, preventing you from believing everyone loves your doughnuts when they don’t.
If you scale go-to-market before you have product-market fit, you’ll end up with a lot of very unhappy customers, and ultimately, investors. You can force revenue growth for a while, but if you’re not a product-market fit, your customers will churn and your revenue growth will recede. It’s fine to have a few people selling your product as a means of figuring out what the market wants, but their focus should be on providing information to your product team as opposed to closing deals. Resisting the temptation to prematurely focus on revenue growth takes a lot of discipline, but it’s critical. Be honest with your investors and employees if you’re not yet at product-market fit, and what your plan is to get there and how you’ll know when you’ve arrived. That will help you provide them with success metrics more relevant than revenue growth.
- Not Benchmarking Yourself Against Your Industry
As a SaaS company, there is a tendency to talk about “best-in-class SaaS” and for startups to compare themselves to other SaaS companies. However, SaaS is not an industry, it’s a distribution strategy. A company selling platform software to small and mid-sized firms will not have the same metrics as a company selling a standalone application to enterprise companies. Making sure you — and your investors — are benchmarking to the right peer set will help you avoid bad comparisons that can take you down the wrong strategic road.
Avoiding the above common mistakes can help you ensure your startup creates happy users, employees and investors.