By Martin Zwilling
After many years as a mentor to aspiring entrepreneurs, and an occasional angel investor, I realized that new venture founders all seem to stumble on similar pitfalls, despite my best efforts to steer them to smoother routes. Of course, I would never say never, and passion does overcome many obstacles, but it still pays to learn from a few key lessons of others before you.
You may not be ready to absorb all one-hundred insider rules I found in a new book, Straight Talk For Startups, by Randy Komisar and Jantoon Reigersman, so I’m offering here a selection of my top ten from their list, adding my own insights. For the rest, these authors come with a wealth of startup and venture capital experience, with real-life examples to back up all their rules:
Starting a venture was never easier – succeeding never harder. In the early days (20 years ago), most new e-commerce businesses, for example, cost a million dollars to set up. Now the price is closer to $100 if you are willing to do the work yourself. But “easier” brings more new startups, with more competition determined to rise above the crowd.
Aim for an order-of-magnitude improvement. Make sure your idea has real customer value, a large opportunity, and a sustainable competitive advantage before you start. “Nice to have” or a ten percent cost advantage alone doesn’t make it these days. To get investor and customer attention, you need a tenfold improvement in cost or function.
Know your financials and interdependencies by heart. Most of the tech entrepreneurs I know pay minimal attention to the financials. They assume that “if we build it, they will come.” Early investors expect you to explain five year revenue projections, gross margins, and break-even. At rollout, you need to add cash flow and customer acquisition.
Net income is an opinion, but cash flow is fact. A large customer like Walmart will provide a large net income, but can easily kill you with cash required for inventory and receivables cycles. I recommend that every startup CEO sign every check personally, and be miserly in managing payables and expenses. Out of cash means out of business.
Don’t accept money from people you don’t know well. Many entrepreneurs argue that the color of the money is the same from all sources. They fail to realize that investors are like spouses, requiring chemistry and a complementary win-win relationship for long-term success. Take your time courting investors, and get views from peers and advisors.
Avoid professional investors unless you absolutely need them. If you don’t want a boss, don’t look for an investor, since they can be the toughest boss you ever had. Fund it yourself and grow organically to avoid the cost, pain, and time of finding angels or VCs, and keep control and equity for yourself. Over ninety percent of startups today are self-funded, or use only friends and family.
Don’t let a short-term fix become a permanent mistake. Crowdfunding, for example, may seem like a good fix for initial funding, but usually precludes professional investors later if needed to scale the business. The same is true if you accept unusual valuations or term sheet options to close a specific deal. Every investment has long-term implications.
More ventures fail from indigestion than starvation. Raising too much money can be a curse. Early ventures with too much cash lose focus and are reluctant to pivot. Founders should ask for funding in stages, as the venture builds momentum, decreases its risks, and increases valuation. Hungry entrepreneurs are always the most creative.
The founder should choose the best CEO available. Most often, new venture founders are the solution builder, visionary, and the first CEO. Yet many don’t have the interest or experience to scale the business. Don’t let your ego prevent you from stepping into a better fitting role as the business evolves. It’s more fun than failing or being pushed out.
Choose an exit strategy – don’t wait for it to find you. The best exit for most startups these days is to be acquired by a major player, rather than going public (IPO), or staying private too long. It’s best to start early in courting potential acquirers or investment bankers, rather than waiting for them to swoop in and knock you off your feet.
In addition to these rules, I also want to second the cardinal rule that every entrepreneur needs to be able to explain why the proposed new venture is important to them, to others, and worth all the blood, sweat, and tears that will likely be involved. Only then will I believe that you that you have the potential to beat the odds and change the world, and have some fun at the same time.
The Writer is a veteran startup mentor, executive, blogger, author, tech professional, and Angel investor. Published on Forbes, Entrepreneur, Inc.