We continue the newly started tradition of Monday guest posts. Mark Solon talked to us last week about ‘Drafting The Best Athlete‘. As a reminder, each guest chooses their own topic. We hope you will drop in each Monday to read these brilliant posts. We have a terrific lineup of great guests coming up and that tradition continues this week with John Greathouse.
John Greathouse is the author of the infoChachkie startup advice blog. He is currently a partner at Rincon Venture Partners, a venture capital firm investing in early stage web-based businesses, and is a Co-Founder of RevUpNet, a performance-based online marketing agency. John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. As you can see, John is a very talented teacher, author and entrepreneur. We are very pleased to have him here on TEB.
Without further adieu, StartupFlavor brings you “Ten Rookie Startup Mistakes You Won’t Make” by John Greathouse.
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
Eleanor Roosevelt – US Diplomat & Wife of President Franklin Roosevelt
As an entrepreneur and startup investor, I have helped create companies which achieved two IPOs which collectively raised over $100 million, as well as two acquisitions which totaled $385 million. During those same 25-years, I also made innumerable mistakes. Entrepreneurship is best learned experientially. However, it is my hope that this article will help you avoid learning the following lessons the hard way.
1. Expect Independent Channel Sales Reps To Perform Missionary Sales
Rationale: I cannot afford to hire a direct sales force. Thus, I will recruit independent distributors and they will sell my new and innovative products on my behalf.
Fallacy: Third-party, OEM (Original Equipment Manufacturing) representatives succeed once the sales process is defined, proven and documented. You must first create the playbook by which an independent sales rep can readily sell your product, including: identifying objections and developing strategies to overcome them, creating reference accounts and establishing meaningful customer adoption.
2. Secure Your Intellectual Property Too Early
Rationale: My idea is so mind-blowingly fantastic that I must immediately spend a small fortune to protect it before I perform any market validation.
Fallacy: Adventures tend to evolve once you begin speaking with pesky customers and demanding partners. Thus, follow the guidelines outlined in IP – Worthless To A Startup and only spend significant time and effort protecting your intellectual property when it is clear what you are trying to protect.
3. Attempt To License An Idea
Rationale: My idea is so mind-blowingly fantastic, I can sit back and count my money while someone else does all the heavy lifting to make my idea successful.
Fallacy: As discussed in Spilling The Beans, ideas are worthless, while skillful execution is priceless. Value is created through diligent hard work. Commercializing an idea involves defining and validating an economically viable value proposition. Once you prove that a substantial, addressable market segment is willing to pay a price for your solution that exceeds your costs, you can consider a licensing strategy.
4. Perform China Syndrome Market Analysis
Rationale: If I can sell my solution to just 1% of all the people in China, I will have a hugely successful adVenture.
Fallacy: Such abstract extrapolations are meaningless. In order to reasonably assess the size of your addressable market, you must perform a bottoms-up analysis which is based on a number of elemental assumptions.
For instance, if you are operating a subscription-based web service, you might estimate the reach of your proposed marketing budget by approximating the various points of friction in your customer acquisition funnel, such as: the percent of users who will click on your ads, the percent who will then complete a lead form, the percent who will download your solution and the percent of trial users who ultimately convert to paying customers.
5. Allow Partners To Write Your Agreements
Rationale: My company is small, I am super busy and I am not a lawyer. Thus, I will let my Big Dumb Company (BDC) partner write our agreement.
Fallacy: The very fact that your company is smaller and has fewer resources is the reason you should draft all of your significant agreements. As made clear in Kiss Of Death Contract Provisions, entrepreneurs can control the tempo of the contract process while ensuring that the agreement properly reflects the spirit of the respective parties’ discussions when they write the initial iteration of the contract and do not delegate the drafting process to dispassionate and uniformed lawyers.
6. Rely On A Public Relations Agency
Rationale: I am not an expert in public relations (PR). Thus, I will hire a firm which has the appropriate expertise and industry contacts.
Fallacy: The sad reality is that PR Firms value their relationships with media and industry gatekeepers more than the value their relationship with any single client. As described more fully in PR Passion, this causes even the most earnest third-party PR professional to champion your message only so far. Once they encounter resistance from a trusted media compatriot, they will invariably relent, in order to protect their long-term relationships.
Conversely, if you conduct PR in-house, you will not be so easily deterred. Public relations at a startup is a sales process. No one has heard of you, your company or your solutions. When you are unknown, creating marketing awareness requires passion and persistence, two attributes in short supply at most PR firms.
7. Hire A Consultant
Rationale: I am busy and do not have time to accomplish all of my critical tasks. Thus, I will hire a consultant to augment my efforts.
Fallacy: Frugal Is As Frugal Does makes the case that an entrepreneur’s two most important assets are time and money. Unfortunately, consultants typically cost you both. In addition to paying the consultant, you must invest time to educate them. In many instances, it is difficult to gain an adequate return on this time investment, as the knowledge transferred is “lost” once the consultant moves on to their next client.
Cash at a startup should always be spent as if it is in short supply, no matter how much money you have in the bank. When a consultant attempts to earn your business, they will tell you that they adamantly believe in you and your adVenture. Evaluate their sincerity by issuing the Blondin Test. Ask them to accept equity in exchange for all or a portion of their overall compensation. If they really believe in your business, you might be able to craft a deal in which you gain valuable, incremental bandwidth while mitigating your cash outflows. In Beware The Consultant, I describe how you can structure such equity-based relationships.
Note: There are clearly tasks which can be effectively outsourced at a startup, when: (i) they do not require a significant time investment on the part of the entrepreneur to educate the outsourcer or, (ii) the knowledge gained by the outsourcer is not critical to the adVenture’s operations. I am differentiating here between outsourced services that execute rote, routine tasks and consultants hired to performed ad hoc, mission critical engagements.
8. Grant Exclusivity
Rationale: If I can secure a deal with a BDC, they will “put my company on the map” and the resulting notoriety and market validation will help me solve many of my problems. Thus, if I have to grant exclusivity to gain a BDC’s love and affection, it is worth it.
Fallacy: Most BDCs are driven by the fear of failure, rather than hope for gain. Their motivation to work with you is typically heightened when they fear that your unique and compelling technology might fall into the hands of one of their competitors. Thus, you have negotiating leverage as long as this threat is legitimate.
Even benevolent BDCs lose interest in your solution once this competitive risk is eliminated. In many exclusive arrangements, the BDC will effectively place your solution “on the shelf” and move onto the next competitive threat
In the event you are forced into an exclusive relationship, there are several tactics you can deploy which minimize its potentially negative ramifications. I describe a number of them in “Excludesivity”, such as; limiting the length of the exclusive term or conscribing exclusivity to a specific geography. However, you will establish a more effective and mutually advantageous relationship if you can avoid exclusive terms outright.
9. Engage In Premature Deal Adulation
Rationale: The buyer/partner/prospective employee said “Yes.” Since I am busy (sense a pattern here?), I will celebrate my latest victory and then quickly move onto my next challenge.
Fallacy: It is not over when the fat lady sings, it is over when you leave the theater. At Expertcity (creator of GoToMyPC and GoToMeeting, acquired by Citrix), I would stop over-zealous salespeople in their tracks by reminding them that they were in a “PDA Free Zone.” Premature Deal Adulation is when you congratulate yourself once the other party agrees to your deal terms. In reality, when you hear “Yes,” it is time to get to work.
For instance, when you hire an A+ Player, be assured that when they announce their imminent departure, their current employer will go into DEFCON Five mode to keep them employed. They will be offered more money, a new stock grant and potentially even a promotion.
Inoculate your recruits from this inevitable win-back ploy, by telling them, “You know what is going to happen as soon as you tell your boss you are leaving? She is going to offer you more money, more stock – whatever she thinks it will take to keep you. If I were you, I would be thinking, ‘Great, but where was the love last week? Why are you just now noticing that I am worth keeping?’”
I routinely used this approach with key hires and in a number of instances, the new employee would later tell me, “You were right. As soon as I told them I was quitting, they offered me all kinds of stuff and I was like, ‘Hey, where was the love last week?!’”
The same phenomenon occurs in the sales process, as Mark Suster’s notes in THIS terrific entry. As soon as your new customer notifies your competition that they lost the deal, they are likely to lower their price, offer more value and do whatever they can to take the deal away from you.
Thus, no meaningful deal is done until the employee is sitting at her desk, your customer’s money is in your bank or the partnership agreement is being implemented.
10. Grant An Investor Anti-dilution Protection
Rationale: A particular investor brings invaluable expertise and credibility to my adVenture. Thus, I am willing to protect their investment from future dilution.
Fallacy: No investor is so vital as to justify shielding them from the effects of future funding rounds, granting options or issuing warrants.
In order to reduce the friction between you and your stakeholders, strive to keep everyone’s interests aligned. As long you and your stakeholders are figuratively in the same boat, your collective decisions are more apt to be in the company’s overall best interest, rather than that of a particular constituent. Granting anti-dilution protection can result in misalignment on a number of fronts. Maintain alignment by ensuring everyone equally shares the pleasure and the pain of dilutive events.
11. Over-Promise And Under-Deliver
Rationale: In order to gain the attention of investors, recruit A+ employees and strike meaningful partnership deals, I have to make my startup appear larger than life. Puffery works in marketing, so I will deploy it when I promote my startup.
Fallacy: Yes. Your commitments to investors must be significant enough to compel them to write you a check. However, keep in mind that investors are inundated by people who routinely overpromise and then apologize for not hitting their mark.
As eight-year olds who sell lemonade know, there is a certain charm associated with helping a fledgling startup. Thus, do not run from your startup status. Entrepreneurs who are confident yet humble, are rare and thus especially charming.
In Great Expectations, I describe the importance of maintaining a positive slope in your stakeholder relationships. For example, if you indicate that you will generate $1 million in sales and actually deliver $750,000, you will be viewed as having failed. However, if you forecast $500,000, your $750,000 outcome will be considered an outsized victory. Maintaining a positive slope requires sound judgment, as overly conservative prognostications will fail to Enchant anyone.
By the way, you may recall that at the outset of this article I “promised” you Ten Mistakes You Won’t Make, but I actually over-delivered by sharing the perils of eleven blunders.
Make Your Own Mistakes
Take Mrs. Roosevelt’s words to heart and learn from my mistakes. It took me twenty years of hard work to screw up so thoroughly and it only required a few minutes of your time to alert you to these potential pitfalls. You can avoid additional missteps by finding a qualified and experienced addVisor who is passionate about your adVenture.
Remember, the only people who never make mistakes are people who never do anything. Make a capacious number of mistakes which are not discussed here, but be sure to learn from each of them so you can later caution other emerging entrepreneurs what not to do.