Founding a startup today gives you a better chance of succeeding than ever before. Billions of dollars ready to invest, new talent graduating every week, code easy to deploy/reuse and hundreds of tools, services, methodologies and books freely available. With all of this, of course every startup should succeed… right? Nope, not even close. Estimates range from 70% to 95% of all startups still fail and there’s a good chance it starts with the founder. Here’s why.
1. I need a co-founder!
Young entrepreneurs look for a co-founder at the drop of a hat. They say “I need a technical co-founder” as soon as they have their idea. In fact, you do not need a co-founder, you need an employee willing to work for equity
I see finding a co-founder as equivalent to finding a spouse. Even love-at first-sight couples get to know each other’s sock sizes before tying the knot. Take your time, get your new-found potential co-founder on board as an employee with vesting shares. If it really works out, you can offer them more shares and a coveted co-founder title. Just make sure that this person will really stick by you when things get tough; that you get along not only when things go smoothly, but when all hell breaks loose. Get to know their values, goals and approach to life before tying the knot — just like a spouse.
2. Too many co-founders
A company with too many people at the head causes problems. The issues often come from having ‘too many cooks’, which slows down decision-making. Losing this agility early on can easily kill a company — often because users lose interest as they wait for product updates, or a competitor blows past in gaining market recognition and share.
If the company survives the initial growth period, other issues can arise. As the company matures, investors can feel uncomfortable with too many people in charge. The risk is too high and the company’s cap table will look crowded and unwelcoming.
You can easily avoid this problem: keep the number of founders small, within the two to four range. No matter how many you have, I highly recommend that the founders meet each and every single morning for 5 minutes to share the last 24 hours of activity. Like clockwork, this regular heartbeat can ground you all, quickly resolve issues, and maintain a tighter vision to drive your startup to success.
3. Slicing the pie
When slicing up the pie, do not forget investors. Splitting the equity 50–50 between founders may sound democratic and fair, but what happens when one person puts in more time/effort than the other? What happens when other people join for equity? What do investors get?
First, make sure all shares have a vesting period. This means that each shareholder’s slice of the pie only activates as time goes on. Startups commonly assign shares on a 4 year vesting period (48 months) with a one year cliff. For example, if you assign Marlene 1M shares, she actually owns zero in the first 12 months. After a year, she will get 25% of her shares (12/48=¼=25%). Every month of active participation in the company operations thereafter, she will get another 1/48th of her shares. This continues until all shares are assigned in 4 years. If Marlene leaves after 24 months she keeps half her shares in exchange for work rendered and the remaining shares go back into the ‘unassigned’ category. If she leaves after 8 months, she gets nothing. Making all founders and employees play by these rules ensures equanimity and creates confidence when talking to investors.
When you set up your startup, choose how many shares to issue. Often people choose 10M in the US tech startup world, but you do not have to issue all 10M. . You can assign 60% to founders on a vesting schedule. Put 20% aside for future investment and 10% aside for an employee options pool. The remaining 10% remains unassigned, ready for whatever arises. This kind of structure minimizes problems as the company matures.
4. Which user? No user? One user.
Know your user. I do not mean theoretically. Go meet your user, sit with them, get to know them. Meet them where they live and work and play. Get to understand their pains and their opportunities, their habits and their annoyances. Get inside their heads and their lives. The insight you get from this will avoid the three most common product-user errors.
First: making assumptions about your user. You think you know your user because you are one of them. But you do not. At best, you have a skewed version of the user’s needs, promoted by your own biases. These biases will cause you to make many assumptions about how they will regard, use and react to your product. Getting to know the user will address these assumptions directly.
Second: confusing ‘wants’ with ‘needs’. Henry Ford’s saying never felt truer: “if I asked people what they wanted, they would have said faster horses.” People generally do not know what they need. Your job (and that of your user experience designer) involves listening to what they say they want and discerning what they actually need. Observe and get to know your user.
Third: solo-creation vs co-creation. You have done your research on your user and started building your product. You build the final product, present it back to your user, and he hates it. What happened? Consider a few possibilities. Maybe needs changed, maybe we missed something in the research, maybe new services or trends changed the landscape. To avoid this keep the relationship with your users alive while you design and build your product. Use their continued insight to validate your worth in the market.
5. No delight factor
All products operate on a scale from pure functionality (a door) to pure delight (a piece of art). Apple products, for example, reduce the number of options a user has (a user cannot control the colours of the interface) but increase delight (the subtle colour changes create a gentle sense of depth). Microsoft has always provided much more control (functionality) in Windows with much less delight. You need to decide where you want to fall on this spectrum early on.
When I led a team to build an internal system for Sony Pictures, the executives argued that we needed a highly functional system and we should not take the time (or expense) to make it beautiful and intuitive. The argument went “it’s an internal tool, it does not have to look good, it just needs to work”. We took a different approach. We saw that the most aggressive Facebook user spends a maximum 3 hours on Facebook a day, a luxury product with lots of delight. Our internal user spent 6 to 8 hours a day in our system, a necessity product with zero delight. To keep users happy we needed to create way more delight than Facebook, not less. The system had unprecedented adoption.
Do not think of delight as an extra. It attracts users, simplifies adoption, creates loyalty, generates press, increases user happiness, beats the competition, provides unique selling points, attracts investors and much more. But remember: balance. Too much delight will sacrifice functionality, which does not work either.
6. What’s in the world?
Pay attention to trends. Products and services fit into the world around us, which continuously changes. Founders often assume things will be the same in a year as they are today, and in modern times this can lead to a fatal end for a startup that doesn’t keep ahead of trends as the founders have their heads down developing their business.
Look for 4 major types of trends:
- technology trends: new technologies, more efficient technologies (faster chips, cheaper sensors)
- societal or social trends: changes in customer values, priorities, or lifestyles (environmentally-friendly, organic)
- regulatory trends: deregulation, tightening or lowering of barriers of entry (JOBS act, reclassifying death as a disease)
- socio-economic trends: demographic shifts, changes in wealth distribution (urbanisation, discovery of new national resources)
These four buckets capture most trends, but stay alert to the news, read up on the world and the global, national and local shifts as they happen. Curiosity powers innovation. Also use it to protect your investment.
7. Too many features
Launch small. We’ve all heard the mantra ‘fail fast’, I tend to amend that with ‘fail fast and learn something’. This idea forms the core of lean startup methodology: applying the scientific method to business. Try something out on your users, measure how it resonates, design more and try again.
Many startups die of feature overload. Founders push to include every feature they believe their user needs before launching. A bloated product launch and no one understands how to use it. Too many new ideas, too many paradigm shifts. It may be that this product is exactly what the users ultimately need, however, it lacks a gradual introduction. Start with a small focused feature and grow from there.
8. The one person show
You have fought with everything you have to create a product and build a team, now let them do their job. The blood sweat and tears of founders can blind them to how much they smother their team.
When you hire a competent and excited team experienced in product, marketing, technology, user experience and more, you have to let go of the product details and let the team take over. Founders find this difficult. Trusting a new person with your baby will never come easily, but if you don’t — if you micro-manage, question everything they do, veto team decisions and dis-empower them — you will fail.
Create a safe environment for the team to grow, make mistakes, learn and challenge themselves. You have other things to do.
9. Scale this!
Which brings us to scaling. You have completed your early startup struggle and have some investment. You now need to increase traction and grow into your market. Now you have a team, a product and a company, the nature of the founding role changes. You will move from being a visionary and jack-of-all-trades, to a founder. You will have to spend your time raising money, networking, exploring opportunities and most of all, clearing the path for your team so they can make the company run.
This transition scares founders and I have seen startups with every other metric of success stagnate or die because the founder did not let go.
10. Check out my new car!
You’ve been eating ramen, paid for with the last few dollars on your credit card. You just raised your first round of proper money. Time to pay off your debt and drop a pretty penny on a Corvette. Nope. Unless you have made a particular arrangement with your investor to pay off personal debt, you cannot do it with that investment. Maybe you loaned the company a bunch of money, the last you had. That loan should have specific terms, in writing, so that you can receive repayment. You cannot just dip into the money and take what you want. Founders do this all the time. Aside from the ethical questions, it’s not the best thing for the business.
You can pay off personal debt by starting to take a salary (at last) and using some to pay off your cards. You can make an arrangement with the investor to sell some of your personal shares in the business in exchange for cash, which you can use to pay off debt. This investment means you have created a viable business; keep focused and soon your debt will be paid and you will have a brand new Tesla. Patience.
I have known quite a few founders that barely sleep or eat. Only one out of at least 50 led to success. Some people can happily work and stay healthy on 4 hours of sleep. That’s great! But, we’re talking about people who require 7–8 hours sleep,work 18–20 hours and find little time to properly rest. The people who think that working without rest or eating properly will mean they get more done. We call this a false economy.
Working for more than 90 minutes without taking a break yields diminishing returns in the average human. Our bodies generally work in 45 minute cycles. After two cycles, we need to rest our brains and bodies before returning to work. Ideally, 90 minutes work, 15 minutes rest. Do that 4 or 5 times a day and then do something else. You will find each 90 minutes extremely productive. In this way, the cumulative productivity of those 6 to 8 hours (90×5) will equal more productivity than the exhausting 18 hour day.
12. What culture?
Culture starts with a team of one. You set the culture of your team the day you start working. Everyone else who joins you or funds you from there on will contribute to your culture. Actively promoting a strong culture in a startup can save millions of dollars and masses of heartache.
Build a culture where people can experiment and learn, where people reward open communication, where everyone measures and shares achievement, and where everyone has a great home/work balance. This culture of support and productivity built on a foundation of trust and transparency leads to a very strong team that will band together to tackle the problems that their startup faces.
Ignoring the creation of this strong culture can lead to high churn,, a slow-moving team, and other ultimately disastrous scenarios. Form culture early.
13. Linear vs logarithmic
Technology changes at a logarithmic pace. Meaning when you are 3 months in on what would normally be a 6 month process, you may actually be 98% done. Lean product development works the same way. It takes a long time to get a general idea to that first prototype. It takes a long time to test that prototype and get to the next iteration. This process continues and seems to take forever, however, at a certain point we hit the curve and everything accelerates. A lot of founders give up or change direction before they hit the curve. Their patience gives out with success just around the corner.
People naturally think in a linear fashion. You need to actively look at things logarithmically. When you think things are going slowly, look back at the journey so you get perspective on how much acceleration you have actually experienced. This will give you a good measure of whether to change or move forward confidently.
Many founders get caught up in measuring everything, and ultimately find it overwhelming: number of users, number of page clicks, number of downloads, number of canceled clicks, number of page reloads and on and on. Really, in the first few months or years of a company we have extracted 5 key metrics that matter:
- Revenue and
The so called ‘pirate metrics’ Eric Ries defined in Lean’s innovation accounting. Tracking key numbers can lead from idea to product rapidly. It can also help raise investment, track ongoing issues and highlight upcoming trends. From these metrics you can derive other key numbers such as lifetime value of a customer (LVC) and cost of acquisition per customer (CAC). The trick is to focus on each one of these at a time when starting up. Focus on doing everything you can to your product and it’s marketing to raise these key metrics. Stop trying to track everything, and just track and affect the few things that matter.
15. The S&M problem
A lot of startups squander their first big paycheck on gaining new customers. Don’t. Your startup proved product-market fit. You have a few thousand users loyally on your platform. You just raised $20M in a Series A to help you scale. At this point, many founders throw a gigantic sum at sales and marketing, we call this the S&M problem.
You start to push out new ads. You hire a great PR firm. You employ all kinds of new methods; using your new staff to create improved sales funnels. These people come on board and you see more revenue. It seems great… until you notice that you’re not really making any money. Your funnel has a leak. These new users have no loyalty and leave the platform soon after they join. You have an epic churn rate.
Remember how you had those few thousand loyal users on your platform when you got funded? You got them by paying attention to them, creating features for them, listening to them. You need to continue to do the same thing for your new users. Put money into customer service and find a way to funnel suggestions and complaints directly to the product team. A company like Wix can get a bug complaint in the morning and have a solution to market within hours. Focus on creating new features that your users request. Create new revenue streams from the activity you see. In short, continue to approach with the lean method. Build, measure, learn. Spend as much time, money, and attention on retention, as on acquisition, to avoid this fatal error.
Other errors and issues may arise for founders, but preparing for common mistakes will minimize risk rapidly for your business. Avoid these easy pitfalls and together we can radically reduce the number of failed startups. Let’s raise the success margin and get to know these errors before they happen. Don’t fuck it up.