6 Startup Lessons Learned from Previous Mistakes

startup lessons

Successful startups typically possess leaders who are “Geeks” and leaders who are “Suits”!

I have had the opportunity to create, establish, build, invest in and restructure more than two dozen businesses. Some of the opportunities pursued resulted in business failures, others became reasonably successful operating entities with a few resulting in successful exits and a couple actually culminated in IPO events.

During this journey my associates, bosses, co-founders and partners and I made numerous mistakes and learned a variety of startup lessons. While we experienced business failure our efforts related to them were not necessarily failures as the learnings from them strengthened us for the next entrepreneurial steps in our journey.

Following are six lessons I’ve learned from our mistakes:

 1. Product market fit is to the startup what location is to real estate.

In the real estate industry it is common knowledge that identical homes can increase or decrease in value dependent upon their locations. Similar factors apply in the startup world.  Customer acceptance of products or services from the entrepreneurial world depends upon the perception of the potential user / user market  that the product or service will resolve their problem, their pain-point.

In effect, it’s not just about the product or service, it’s about how it is perceived, how it is positioned for the user; how it is marketed. Products and services which include built-in features to demonstrate the value to the user have a significantly higher probability of acceptance in the market. Therefore, those services are much more valuable to the potential user. Products without these features may be significantly similar, but may never convince the users of the value they may bring.

2. A team of passionate, coachable “villagers” is required to scale a startup.

To scale a startup requires a team with multiple, passionate, knowledgeable, complimentary leaders focused on leading their team and navigating execution. However, it also requires users have become familiar with and appreciate the value the product brings to their community. Without the development of an engaged user base to support the product’s promotion, scalability is less probable.

3. Ideas are worthless without execution.

Successful startups typically possess leaders who are “Geeks” and leaders who are “Suits”!

The “geeks” are idea people. They are constantly thinking and considering how things can be better. They are creative and love the brainstorming of new ideas and ways to solve problems. Many prefer this theoretical world to actually following up and making their dream a reality. Some have new ideas almost immediately that supplant the last one.

The “suits” are process wonks, they tend to be disciplined and tend toward execution in lieu of creativity. Suits are focused on making things happen. Some may not have an original idea in their heads.

While this is overstating the reality of both leadership types, it is clear that the successful startup needs both. The “geek’s” idea, which is not executed upon, is of little value. The execution of the “suit”, without an idea to execute, accomplishes nothing. The best ideas are from entrepreneurs who put together teams capable of executing. Only then does value accrue to the entrepreneurs and potential investors.

Six Lessons I Have learned from Startup Failure

4. Seek balance in your valuation and terms, not perfection.

Many entrepreneurs are inclined to maintain maximum equity levels by demanding as high a valuation as they can possibly attain. The successful entrepreneur recognizes this approach may set them up for failure; therefore, they pursue a more balanced approach with both their valuation and the terms of the deal. Startups with extraordinary strong valuations in early rounds may later learn those valuations were artificially high for various reasons. Should that occur, it may result in the next round being a “down round” in which the valuation actually declines when more sophisticated investors consider the opportunity. Such a “down round” is likely to aggravate the early investors and may even spook some potential investors for the current round.

The entrepreneur should also consider their long term non-financial objectives related to the investors. Entrepreneurs seeking smart money with investors who can support the company with expertise, experience and their networks, will desire to develop fair, win / win relationships with those investors. Squeezing valuation and investment terms to perfection may result in less than perfect relationships with investors. The investors that could be highly supportive, may, in the end, decide not to invest at all, for these “soft” reasons, even though they find the concept compelling.

The Holy Grail of Entrepreneurship: The Term Sheet

5. Select your co-founders carefully; make sure you are diverse in culture, background and experience and compatible in objective.

Founders with different cultural backgrounds, experiences and skills enable them, as a team to take a multidimensional view of opportunities and issues that arise. This results in better decisions. Such diversity is a must for the successful, scalable startup to permit it to develop and grow. However, one consideration often overlooked is the value systems, objectives and future expectations of these co-founders.

Should the entrepreneurs have significantly different values systems or objectives such as:

  • views of the culture they want to establish within the company,
  • exit expectations,
  • their financial strength and commitments;

then it would be wise for the co-founders to discuss these issues openly and establish appropriate contingency plans to address them in the event of conflict.

6. Keep thou Balance Sheet clean!

Investors in concept, seed and early stage companies desire to help startups with potentially high growth models and strong management to scale to market. Their interest is to provide the resources, financial and intellectual, to help the startup’s team to scale the company. If their investment will be utilized to pay off previous debt, it cannot be used to scale the company.  As such, these investors expect the investable startup to have a clean balance sheet.

To maintain a clean balance sheet, the entrepreneur should not:

  • Encumber it with debt beyond typical accounts payable with standard terms
  • Accrue salaries for future payment
  • Accept responsibility for third party liabilities
  • Take actions resulting in the accrual of significant contingent liabilities to be paid in the future.

(Note that Convertible Notes with reasonably standard terms for conversion to equity are not generally considered problematic by most startup company investors.)

Additionally, they should generally minimize the number of investors on their cap tables and insure those investors meet the appropriate guidelines as issued by the SEC.

Hopefully the lessons we learned above will strengthen you for the next entrepreneurial steps in your journey.

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Tony Lettich

Tony Lettich has previous Business Analysis, Business Valuation, M&A, and Venture Capital experience and currently serves as the Managing Director of The Angel Roundtable and a Partner in Sheehan, Lettich M&A Advisory. He is also a co-founder of FundingSage, which provides valuable information, tools and resources to entrepreneurs seeking to launch and build startups.