The Top Mistakes Entrepreneurs Make
Posted on January 9, 2008
Filed Under BS-Free Advice |
There are always “rules” and “tips” for entrepreneurial success, but I’ve seen far less discussion on the mistakes entrepreneurs typically make that can often be easily avoided. Since mistakes can make or break businesses, I’m a mistake-oriented person. At best, I try to avoid them altogether and at worst, I try to never make the same mistake twice.
So without further ado, here are the top mistakes I believe entrepreneurs make. I’ve personally made all of them with the exception of being too eager to raise outside funding.
Mistake: Being Unrealistic
Far too many entrepreneurs are unrealistic. This happens for a variety of reasons. Some are just plain naive while others are far too attached to their businesses and ideas to see things objectively. Being unrealistic can be fatal for a business. For instance, it can result in outrageous financial projections that will almost surely never be realized, the perception that the market for a product or service is much larger than it actually is, a warped sense of the value of a business or the ease with which the business will develop. The truth is that most new businesses fail and the odds are always against you.
All businesses face challenges and entrepreneurs with unrealistic expectations are much more likely to be blindsided and unable to cope when these challenges become apparent. Some, despite challenges, fail to believe that there are problems and continue down a hopeless path. Thus, it can be said that being unrealistic prevents the entrepreneur from developing effective strategies that might otherwise assist him or her in finding ways to succeed.
Entrepreneurs should always have access to independent, honest opinions from individuals they know won’t bullshit them. In other words, you need your own Drama 2.0 (or ). Of course, having access to independent, honest opinions alone is useless if you are unwilling to listen to them.
Mistake: Focusing Too Much on the Long-Term
Far too many entrepreneurs are focused on the long-term direction of their businesses, not recognizing that the short-term challenges almost every new business faces are far more deserving of their focus. After all, if you don’t deal successfully with the short-term, there is no long-term. While it’s important to have a general long-term vision for your business, the odds are that this will be changed over time.
The sad truth is that many entrepreneurs waste a considerable amount of time, energy and resources on long-term planning that never gets applied, either because the business failed or because the business changed. Don’t worry about hiring for positions you won’t need filled years from now if you happen to hit your projections. Don’t worry about finding the perfect office space for the corporate headquarters you don’t yet need. And don’t worry about how you’re going to spend your billions. Chances are, if you are worrying about those things, you’re not worrying about what matters most: how your business is going to make it past next month.
Mistake: Not Investing Others in Your Success
A great business requires great people and it’s difficult for a single entrepreneur to build a great business. Getting great people involved with your business requires that those people are invested in your success. Different people are motivated by different things, but in general, the following are prerequisites for ensuring that the people you work with are invested in your success:
- Fair compensation. Whether it’s cash or equity, people have to feel they’re being paid what they’re worth.
- Respect. Few people enjoy working for a person who is disrespectful, dishonest and who does not value the opinions of others.
At the end of the day, the people you need to help build your business must feel that the effort they’re putting in to make you successful can be correlated to their own success and that this effort is emotionally rewarding in some way. For instance, if you own 95% of the company and you have 2 “partners” who each own 2.5% of the company and are working on a sweat equity basis, you can probably expect them to lose enthusiasm if you treat them poorly and/or you haven’t met anticipated milestones. After all, their level of investment is much lower than yours and without some intangibles that compensate for this, it’s unrealistic to expect that they’re going to be happy.
I’d argue that one of the traits of a successful entrepreneur is being able to get “buy-in” from the people he or she needs to become successful and a big part of this is understanding how people perceive their investment in your business.
Mistake: Negotiating Poorly
Whether you believe it or not, or whether you like it or not, almost every interaction we have with another individual is a negotiation. Most of the time, successful negotiation hinges upon a satisfactory alignment of the interests of the parties who are negotiating. Unfortunately, many entrepreneurs are not aware of this and see negotiation as a battle. This results in dysfunctional business relationships that typically result in both parties not getting what they want and need.
While I find that most business books, especially those written by academics, offer little more than trite advice, by far the most useful business book I’ve ever read is “3D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals.” I believe it’s required reading for every serious entrepreneur.
Mistake: Being Too Eager to Take Outside Funding
Outside funding is sometimes necessary for a business to grow, but far too many entrepreneurs seem to think that access to lots of capital is some sort of panacea. It isn’t. As I’ve pointed out before, the VC model for building a business fails for the vast majority of startups because the dynamics of the game the VCs play are different from the dynamics of the game entrepreneurs play. As Mark Cuban has pointed out, taking on outside investment changes your entire situation considerably, mostly for the worse, and for most businesses, “Far more often than not, raising cash is the biggest mistake you can make.”
For most entrepreneurs and businesses, at best, outside capital should not be raised until a business model has been validated and some revenues have been generated. In most cases, if you don’t have the capital you need to get your idea off the ground, you should consider whether you’re in a position to try to get your idea off the ground in the first place.
Mistake: Getting Involved with The Wrong Business
While the odds of any new business achieving wild success are small, it’s not an impossible undertaking. Increasing the odds starts with getting involved with the right business. The right business typically has:
- Capable leaders. A capable leader brings experience, relationships, honesty and good decision-making skills.
- A realistic plan. More than anything else, business is about execution. Companies that execute tend to succeed far more often than companies that fail to execute. As such, a realistic plan for executing that contains viable, tangible milestones and a clear path to achieving them is required.
- A marketable product or service, or the ability to develop one. All businesses sell something so it’s no surprise that a successful business has something worth selling that there’s a market for. In the startup world, where entrepreneurs may be getting involved before a product or service is fully developed, there is a need to make sure that the business has the ability to develop a marketable product or service. This requires that the business has the right people and the necessary resources.
Getting involved with a business that doesn’t have a solid foundation, or a viable means to build a solid foundation, is little more than betting on a horse that’s a 300-to-1 underdog. If an entrepreneur can get involved with 10 businesses that are 10-to-1 underdogs, that’s a reasonable, potentially rewarding strategy. Unfortunately, the human life span isn’t yet giving entrepreneurs the ability to get involved with 300 300-to-1 underdogs.
Mistake: Not Knowing When to Call It Quits
Knowing that most businesses fail, there does come a time when it’s time to cut your losses and walk away. The likely or inevitable failure of a business can become apparent through a number of indicators. Some are financial (i.e. the business is running out of money with no clear path of generating income) while others are human (i.e. it becomes clear that the people leading the business do not have the capability to do what’s necessary to move it forward).
Time is an entrepreneur’s most valuable asset and it’s also the most easily spent. Therefore, staying involved with a business when the prospects are bleak is perhaps the worst mistake an entrepreneur can make.
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Drama 2.0 spikes the Web 2.0 kool aid by providing a critical analysis of Web 2.0 startups and the impact of Web 2.0 on the media industry. Other topics are explored when Drama 2.0 has a slight buzz. Read more about the Internet's version of Keyser Söze here.
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Great Post !!!!
Been there done that…
Last year I went bankrupt…
Many of the mistakes listed above are mistakes that I’ve done. Not that I’m proud of it but I think that I can relate to this post… Nice job…
Other notable mistakes:
1) I am an Entrepreneur - No, you’re a digital artist.
The biggest mistake an entrepreneur can make is believing that he/she is an entrepreneur. It’s a romantic myth. A true entrepreneur is a dot connector - one who has access to resources including capital, legal, and the myriad of other services necessary to take an idea to market. Most who call themselves entrepreneurs are really inventors, artists, or small business owners. VC’s are the true entrepreneurs and also are fond collectors of Web 2.0 digital art.
In the U.S. we live in a corporate economy. That bureaucracy creates division of labor. You’ll need a team just to deal with the minutiae.
2) Treating your business as anything other than an investment.
Most likely your product or service is not going to change the world. In that case, your single hope is that your project can at least provide you (and your partners) a meaningful source of income, above what you might get had you deposited your heavily discounted sudo equitas and petty cash into a 6 month CD. There’s a reason VC’s want to know their ROI. You should want to know yours as well.
You gotta ask yourself: Would your capital be better utilized shorting the NASDAQ for the next 12 mos?
3) Power ball’n
If you’re not well connected or haven’t spent years in an industry that you now understand, your business proposition is nothing more than a lottery play. Go ahead, pick your best six.
4) Bootstrapping
Bootstrapping is for kids (or small business owners and lemonade stands). Use other peoples money.
If you solely fund your business out of your own checking account (or credit cards) - than you are an artist. Furthermore, it indicates that you see your idea as a singular “once-in-a-lifetime” opportunity. This as your winning lottery ticket, eh?
Find investment partners (angel, vc, family, friends). This not only spreads the risk, but will help independently (except family) validate your assumptions.
Risk/Reward. Know that your return will be proportional to the risk and amount invested. If your business model cannot utilize a large capital inflow, then you need to reconsider your business model.
5) Not getting a corporate job first.
We have this wonderful system in place called corporations. Their happy to train you for free, teach you about a particular business, and in some cases pay you quite well. Learn the industry and meet lots of people. Then when you recognize a gap where the market is being underserved that’s your time to move. And if you’ve done your networking, you’ll have plenty of industry friends ready to support and buy products and services from you. After all, you understand their unmet needs the best.
Stanley: I agree with some of your comments and disagree with others.
We’re in agreement on:
1. “I am an Entrepreneur - No, you’re a digital artist.” Being an entrepreneur is hip and sexy but most people really do have no clue what being an entrepreneur is.
2. “Treating your business as anything other than an investment.” All businesses are an investment.
3. “Power ball’n.” Relationships are EVERYTHING. As I’ve noted in a previous post, if a competitor with an inferior product is doing better than you are doing with a superior product, it’s probably because your competitor has better relationships than you do.
5. “Not getting a corporate job first.” While you don’t necessarily need to work for a big corporation (working for a small business can be equally valuable), the bottom line is that you probably can’t run a company effectively unless you’ve gained the experience that you can usually only gain by working for one. Most of the best opportunities I’ve had in life are the result of me doing “menial” work for great companies and people. Of course, most of the narcissistic Millennials go into corporations thinking they should be running them after a week on the job which makes the experience worthless.
I disagree with your belief that bootstrapping is a mistake. As I’ve discussed before, bootstrapping forces the entrepreneur to do valuable things (use limited resources creatively, focus on revenues, etc.). EVERY single one of the wealthiest people I’ve met (no billionaires but some worth several hundred million), including those who are now themselves investors, do not hesitate to say that accepting outside investment should be avoided at all costs. Most of them became wealthy because they were willing to put their own money on the line to maximize the rewards. Doing so is the difference between making 8 figures when your bootstrapped company is acquired for 8 figures and making 6 or 7 figures when your investor-diluted company is acquired for 8 figures.
Drama: From an academic perspective, your self-funding advice is correct. That will maximize the monetary benefit for the winners (like your eight-figured friends). But it does nothing for the losers. What may be good advice for the self-funded gambler, doesn’t translate very well for the forward-thinking investor.
For one just starting out, there’s more to be gained from a startup opportunity than simply monetary reward. As valuable are the relationships you form with investment partners and the business counsel you’ll receive. If your eventual goal is to be a serial entrepreneur (dot connecting variety), and not a one trick pony, you’ll need those relationships for your next compounding opportunity.
Stanley: the figures I’ve seen show little difference between the failure rate of VC-backed startups and bootstrapped startups. There is, however, a huge difference between the average amount of equity the founders of a successful bootstrapped startup have at the time of exit versus the average amount of equity the founders of a successful VC-backed startup have at the time of exit.
There is also a huge difference between gambling and taking a risk. You seem to generally think that outside capital minimizes risk but risk is far more nuanced:
1. Bootstrapping a business with your own funds is not necessarily a gamble if you’ve done the right things to analyze the opportunity, understand the market, etc. On the other hand, building a business with VC money can be a gamble when you do nothing other than assume that because somebody gave you money, you have a solid concept. Far too many entrepreneurs skip steps that could avert failure because they assume that these steps are not necessary when somebody else will invest.
2. As I’ve mentioned, an entrepreneur’s most valuable asset is not his financial resources - it’s his time. Many entrepreneurs have gone bankrupt only to come back and make fortunes. You can always recover lost money; you can never recover the time you waste getting involved with a bad business.
Regarding this notion of serial entrepreneurship, as Glen Kelman has pointed out, the vast majority of second-timers never replicate their first successes and nearly all of the biggest hits in the technology sector have come from (previously unknown) first-timers.
Finally, in terms of relationships, having access to capital is a very valuable thing and in many industries it’s a requirement if you want to do big things, but I would hardly call VCs in the tech space “investment partners.” They are in business to make money and if you help them accomplish that, they’ll treat you great. The minute that it’s obvious you won’t, don’t expect them to treat you like a “partner.” This notion of “business counsel” is a myth they use to sell naive entrepreneurs. 90% of the VCs out there wouldn’t know how to build a business from the ground up if an instruction manual was given to them. Most of them are investors, not builders.
At the end of the day, I think there’s a very good reason that nearly all of the ultra-wealthy people I’ve met echo the same sentiments as Mark Cuban: taking capital is, for most businesses, especially in the technology space, a huge mistake more often than it is a wise decision.
There are some excellent insights here.
#1 I think “being unrealistic” is probably a poor choice of title for the first mistake. Some possible replacements
“Not creating and listening to an informal group of trusted advisors”
“Only relying on founders’ perspective”
“Not comparing notes with other entrepreneurs”
I have blogged about some of this in “Seeing the Elephant: the Entrepreneur’s Challenge of Integrating Advice” at
http://www.skmurphy.com/blog/2007/12/14/seeing-the-elephant-the-entrepreneurs-challenge-of-integrating-advice/
and “The Challenges of Advising Entrepreneurs
http://www.skmurphy.com/blog/2007/10/16/the-challenge-of-advising-entrepreneurs/
#2 is a good one, I would try “Not asking what can I accomplish in the next two weeks to move my business forward.”
#3 Choosing Control over Shared Success
#4 is a good one and an excellent recommendation. I think “failing to prepare for negotiations” and “failing to sequence negotiations” are two key mistakes in this area. Especially for software firms, since a software license is the promise of an ongoing relationship, they can take positions or approaches in the negotiation the damages the relationship. Especially with early customers references and testimonials are more important than the amount of revenue.
#5 taking funding because they don’t want to worry about selling or they need a steady income. A key aspect to the “funding question” is one you highlight in the comments “worrying more about how you are spending your money than your time.” I think time management is the key to success for early stage software firms where capital requirements are de minimis.
#6 seems more targeted at early employees.
#7 should be “not defining what lack of success means when you first get started.” The challenge with asking yourself should I call it quits is that it can become a debilitating weekly or even daily exercise for the team. It’s better to pick a “re-evaluation point” that may be 3 or 6 months out, long enough to see the impact from current decisions (e.g. sales strategies, current customer evaluations, current partnership negotiations) and define what “results so poor we should quit or change direction” are. In the moment it’s very difficult to be objective. But it is very useful to go back and look at your decision record, your prediction for the range of likely and possible outcomes from a decision, and use that help guide today’s decision. For a number of reasons, your memory of the rationale for a decision or a strategy is not as accurate as a contemporaneous document that lists rationale and anticipated consequences.
I also agree with you on the bootstrapping point, at least for software startups the initial capital requirements are so low that you should make sure you have a viable idea. Funding that pays your salary ultimately wastes your time if it allows you to persist in an unworkable premise.
I think the key one is probably #2, not making your startup’s success of broad benefit.