Startups: how to avoid death by enthusiasm
This is a guest post by Eran Laniado, the managing director of BMN!
This is heartbreaking: An entrepreneur puts mind, time, and energy into founding and running a new venture, and then recklessly sabotages the startup’s chances to succeed.
The Enthusiasticus Founder syndrome (not to be confused with the entirely different Founderitis) occurs when novice founders, convinced that their garage gig is the next Google or Amazon, make critical mistakes due to the dangerous cocktail of inexperience and over-optimism. Unfortunately, it causes potentially great ventures to die prematurely and founders to forgo future entrepreneurial efforts.
Here are some of the some common signs and symptoms.
Betting the house (especially yours)
Undoubtedly, entrepreneurial success depends on commitment. However, despite the appealing stories about students leaving Harvard or Stanford to launch great startups (you know who we’re talking about!), one should acknowledge the long, risky and painful path to success.
As Paul Graham advises: ‘don’t get your hopes up.’
True, successful entrepreneurs take risks and, as Brad Feld says, ignore the naysayers; however, entrepreneurs should also estimate the odds realistically and support decisions with external and tangible data.
Therefore, a startup founder with no more than an idea – one who has neither a minimum viable product, nor traction and real customer insights – should take caution. Before taking large personal bank loans, risking your home, or spending all your family’s savings, acknowledge the possibility that you suffer from the entrepreneurial optimism bias.
When pitched with presentations and financial forecasts, VCs and angel investors may claim that the startup’s forecasted revenues should be cut by half and costs should be doubled. These professional investors know that business processes – assembling a strong team, building a product, getting first customers or setting a pilot – are all difficult, and often iterative.
Entrepreneurs should carefully check the realism of their assumptions.
Delays happen unexpectedly, and it may not be wise to devote 100 percent of your time to the venture while consuming personal savings. Scott Adams maintained his day job for 6 years while working nights, mornings, and weekends on creating Dilbert. Numerous founders have been running their startups while keeping their day jobs.
(Tony Wright wrote a nice post about his experience with two part-time, turning to full-time, startups.)
Wasting your cash
Some founders engage in costly, premature, or simply unnecessary activities, while the startup’s resources should be focused, as Steve Blank argues, on customer development and on the search for a viable business model.
So expensive patent applications may not be ideal for some startups, at least early on. Similarly, premature investments in the preparation of detailed business plans, complex financial forecasts, and fancy presentations may not only shorten the runway, but also prove futile, as all of these change dramatically over time.
Most importantly, entrepreneurs should not pay cash upfront to middlemen for leads to potential investors. If you must use intermediaries, choose to pay an acceptable finders’ fee if the deal materializes.
Allocating too much equity
Some entrepreneurs are not cautious enough with their equity and stock options and don’t realize that these should correlate to commitments and milestones.
Of course, sharing some of the pie in order to increase its size makes sense. But think ahead, even before setting capitalization tables, about how much equity to keep for the future. Some ventures may require several rounds of financing. For them, premature dilution has two risks: First, too little equity will be left for future investors. Second, as Paul Graham explains, later-stage investors prefer not to invest in a venture whose founders do not have enough equity left to motivate them. Graham gives an example of a VC who turned down a strong startup simply because investors already owned more than half of it.
Avoiding the Enthusiaticus Founder syndrome
Though the measures are simple and commonly known, overly eager or naive founders skip them. So here is a reminder:
1. Create a board of experienced people.
A ‘mastermind’ (a think tank of trustworthy people) or a board of advisors will do until the time for nominating a board of directors arrives. It’s especially important to get feedback from experienced entrepreneurs before making key decisions about partnerships, investments, and major changes.
2. Consult with professionals.
Some actions may be legally binding, so talk with a lawyer about the dos and don’ts before making seemingly innocent actions (such as sending an email that details future equity allocations). Similarly, consult with accountants or tax advisors before registering a company, and meet with patent attorneys when relevant.
3. Always remember the odds.
Only a few startups make it big, so in order to succeed, you need to minimize your mistakes. Before making decisions, ask yourself: If a friend of mine were running this startup, how would I advise her?
4. Think long term before taking expensive or irreversible actions.
Will the short-term gain of hiring a service now compensate for the negative impact on the longer-term startup’s runway?
Eran Laniado advises multinational firms and mentors entrepreneurs. He gained corporate experience as VP of Business Development & Strategy of a NYSE traded firm and as a member on boards of directors. He writes about strategy, business models, and innovation on his blog on bmnow.com and can be followed at @EranLan.