The Costliest Mistakes Entrepreneurs Make

The Costliest Mistakes Entrepreneurs Make

25-Jul-2014 by JannekeNiessen

Janneke Niessen is Chief Innovation Officer and co-founder of Improve Digital. She is the driving force behind the company’s 360 Platform for real-time advertising. She is co-initiator of the Inspiring fifty, mentor at Startupbootcamp and Board Member at IAB Europe. She is an angel investor, board member and regularly speaks at events about digital media and entrepreneurship.

The Entrepreneurial Adventure

When you start as an entrepreneur there are many things you don’t know. There might be things you think you know (or you hope you know), but mainly, there are just unknowns. In fact, if you’re lucky enough to be just a little bit self-aware, there is actually only one thing you know for sure when you start out: you will make a lot of mistakes along the way.

Even the most successful entrepreneurs make mistakes. Any entrepreneur that claims differently is lying. And mistakes themselves are not a problem as long as you manage to learn from them. In fact, sometimes, mistakes can themselves be a gift. It’s said that great inventions like penicillin, the pacemaker, and, yes, even potato chips, all came about by mistake. Most times, though, mistakes are simply expensive – in terms of time, unnecessary spend, missed revenue, energy and even company reputation.

For some start-ups, when “trial and error” leads to too many errors, mistakes can become a huge cost driver, and sadly, they are almost impossible to anticipate in an early stage business plan or P&L. If they would appear on your P&L they very likely will be the biggest cost item. Not only is planning for mistakes nearly impossible, avoiding mistakes is even harder. Certain mistakes are simply unavoidable. Start-ups are always high-risk, and even with all the right advice and the best planning, circumstances can change on you. Warning signs can be missed, ignored, misinterpreted, or underestimated.

All of this is par for the course when you’re doing something that hasn’t been done before. Even having helped build two companies, each finding a successful exit, I have surely still had my fair share of failures. And with this post, I wanted to share my thoughts on what are by far the costliest mistakes an entrepreneur can make. If my modest contribution helps someone out there avoid even just one big misstep, I’ll be more than satisfied, as I know I’ll have saved them a lot of money and a lot of grief, churn, and distraction.

And who knows, maybe this post could make the difference between some now unknown company being number one or two instead of number three or four in their market. Maybe even making the difference between having a big exit or being an also-ran, having a strong Series B or living with a ‘down round.’ Or worse yet, having a little money on the bank at the end of the year or having none at all.

With the benefit of hindsight, what follows are some of the areas where I, my co-founder, and team members could have screwed up but instead simply nailed it; mixed with bullets that we dodged; and a few areas where we may have missed the mark, but learned from and corrected quickly enough to avoid true disaster. Think of this not so much as a “list of mistakes”, but more as a list of “areas of focus.” In preparing for this post, the initial list got way too long, but I am hopeful that I’ve narrowed it down to those that are most important and have the broadest relevance.

1. People.
2. People.
3. People.

People are your most important investment and often your largest cost centre. The wrong hires are death for your business. You lose money in misspent salary. Worse, you lose time and opportunity with unused training. And sometimes, you can poison morale and culture through the presence of bad actors or underperformers, and end up inadvertently forcing out someone really valuable. In short, bad hires are never a good idea.

And that’s what makes hiring maybe the hardest part of the early stage entrepreneur’s job. She is literally betting the fate of her company on a handful of folks she convinces to attach themselves to her crazy dream. So, who are the right hires? I have the benefit of a colleague with a sixth sense for cultural fit and personality match. We come at it with our respective “glass half empty” and “glass half full” perspectives, and that almost always leads to the right hiring decisions in the end. I’m lucky that way. Find that person yourself, and always get a second opinion before signing that offer letter. And if someone you truly trust has misgivings or tries to warn you off of someone, take pause and listen.

Beyond that, there are three golden rules of hiring I follow – some you’ve surely heard in other ways in other times. But they get more true with every day that passes.

Hire people better than you

Your core team needs to be better than you at what they do. If not, you are going to micromanage them – not because you want to, but because you must. As a founder, the temptation to micromanage is already too real. You are the founder, this company is like your child. So, why would you let anybody do things that you can actually do better? This isn’t about ego – it’s okay to be the founder and not be the smartest person in the room. In fact, it’s a bit of a relief. Because the sad truth is this: You do not scale. Without hiring “up,” you will inevitably become a bottleneck for growth in the company. So unless you have the ambition to stay small, hire people better than you.

Only hire the best people

Don’t settle for less because your budget says you can’t afford more. At the same time, don’t overspend on a single person when the money simply isn’t there. Balance opportunity with opportunity cost, budget with future revenue opportunity, and spend smart. But spend when you need to. Looking back, hiring the wrong people has been the most expensive mistake I have ever have made in terms of money spent, opportunity cost, time invested building them up, and energy wasted managing them out. Great teams build great businesses. Great teams attract even better talent. The right team wins in the market. And when you’re winning, attracting and affording the right talent starts to get a lot easier.

Hire fast, fire faster

You hire people because you need them, and when you fill each new head, you probably realize you could have used them a few months sooner. You’re always short-handed, you’re never covering all of the things you need to cover, and customers are never as happy as they could be. This may makes hiring decisions difficult, but it makes firing decisions impossible. The hardest lesson I learned was to fire fast. But you must. There are myriad perfectly rational reasons to keep an under performer on board for just a little while longer – because of that project, or this release date, or that client. The truth though? Bad hires are like an infected tooth. You can ignore the pain for a long time, but when you least expect it, a bad hire can become positively toxic and put much more at risk. Employees can sense it; clients can feel it; and team culture, service levels, and throughput can suffer. As a good friend and widely respected fellow entrepreneur often says, “No breath is better than bad breath.” Letting someone go is never easy, but in the end you are always happy with the decision, and you only fault yourself for not having done it sooner.

(Side note: It’s worth noting that point three above can apply to clients just as it does to employees. Some clients are hard to serve, setting the bar impossible high, but in the process they make your team stronger/better/faster. And others are just irrational and unreasonable and don’t deserve to be your client. Unfortunately, knowing how to tell the difference is the hard part. That will need to be covered in an entirely different blog post.)

Know when to say no

Focus is super important. Going after one opportunity means you cannot go after another. All start-ups are resource constrained, but all good entrepreneurs are incredibly ambitious. And as a founder, that is the tension you must manage every day. Certain opportunities might look great at first sight, but always take the time to fully understand the implications on your resources – the hard costs, the soft costs, opportunity cost, your team’s attention, and your current clients’ needs. Keep your eyes on the long-term goal and make smart investments in service to that goal. And yes, set some resources aside for experiments and testing. But avoid following divergent paths simply because they seem like a good idea – that is until and unless you’re truly willing to steer the entire company in that direction, and support an entirely new goal.

Remain in the driver’s seat in fundraising

Not being in the driver’s seat when you are raising capital will cost you money in the long run, and probably lots of it. You’re going head to head with professional investors, and you are, at best, an above-average business person or engineer with a really good idea and the will to pursue it.

So how do you retain control? Creating demand and managing the timeline.

If people want you, they are willing to pay for it. That alone gives you leeway in defining some of the rules of play. VCs invest in people they know, like, and trust. Make sure they know you and your company ahead of your fundraising. Do what you can to create a sense of urgency with them to invest as soon as possible. Not only will it streamline the process, it will let you skip a whole lot of “getting to know you” back and forth in the early stages. That alone could cut several months out of the process.

If you can, raise money when you don’t need it. Further, have another option to consider if your first choice is a no-go. You need time on your side so you can easily walk away. Being able to walk form the table is the only leverage you will ever have in shaping the valuation of your company and the terms of the investment. And again, this helps with the process. If you don’t really need the money, the investors are serving you – earning your business – and will be more likely to move as quickly as you want them to.

Raising funds is a very time consuming process and you might rather spend this time on growing the business. This is why staying in the driver’s seat is crucial for your company’s growth – and actually enjoying your work and personal life. Drinking the champagne when the deal is done is great. Getting back to the business of building your company and serving your customers? Even better. Going through those contracts, again and again, on yet another wasted Sunday afternoon? Not so much.

The valuation is not important

Okay, so valuation is important, but it’s not “all that.” And larger is not always better. I read about so many young entrepreneurs that get too caught up in what their non-existent company is worth on paper. That is driven by nothing but ego. Don’t focus on the valuation. Focus on the value of the deal, the team you’re assembling, and the company you are building. If you get those right, everything good will follow. After all, in most cases, the exit is defined by what you’ve built, not by what a banker thinks what you might build could be worth one day when and if these ten thousand other things get done.

Early on, you want to worry more about the size of your piece rather than the size of the pie. Along the way, you can give up some of that as the pie itself gets larger. Valuation in the early stages is just one element of the total value of your deal and the ultimate benefit of a successful exit. And always remember, if the pie is too large to start, expectations are miss-set, and bad things like “down rounds” might follow.

More important is the people you tie yourself to. A VC is a lot like a spouse – once you have them, you’re stuck with them. And for the right investor – partner – I’d trade equity or give up a bit on overall company valuation. It is the VC itself, how they can help you move your business forward and develop the right team, that is the “X factor” in any investment equation you’re faced with. They will be there at the beginning, and you better believe they will be there at the end. And they’ll be asking all of the hard questions along the way at each and every one of your Board meetings in between. Just make sure they are giving as much as they get.

Don’t cut corners

One last piece of advice: Lawyers are like shoes. You absolutely get what you pay for. When you cut corners today, you’ll pay for it later. Legal costs may seem high – and let’s admit it, they are – but for the important stuff, it’s worth every dollar, euro, or pound you might spend. Otherwise, you waste time doing work you’re not qualified to do and risk unforeseen legal magnifications down the line when you do it wrong.

The same applies to other shortcuts. Many entrepreneurs “spend” equity like it’s cash. Sometimes, that makes sense. Sometimes, it is just a waste. What might look like a good deal today (e.g., equity in return for certain types of work) can be very expensive over time, so always go into those trade-offs with your eyes wide open. Ask yourself, “If my company was worth 10x what it is worth today, would I be happy handing that much money to this person for the project in question?” Or better, “Will this person’s work help my company become worth 10x more than it is worth today?”

Needless to say, if you answer yes to the second question, equity trade-off is a lot easier to rationalize.

Learn from children

Before an entrepreneur experiences her first big success, she has surely built on many other experiences, good and bad. And to a person, I predict every entrepreneur you talk to will tell you that their bad experiences have been far more enlightening than the good ones.

Experienced entrepreneurs build great companies that can be fuel for our economy for decades to come. Culturally, however, Europe sometimes has a “complicated” relationship with failure. As a business community, we can be too quick to brand those who make missteps.

Perhaps it’s time to remind ourselves to always monitor and manage our individual attitudes towards failure. If we knock entrepreneurs down every time they fail, or if they were to simply give up with each obstacle they face, the whole system could grind to a halt.

We need to accept that failure happens. That does not mean we should reward it. We should observe, learn, and, of course, level criticism when warranted; but institutionally, we must always embrace it as part of the entrepreneurial adventure. It makes you better as an entrepreneur, it makes you experienced, and it makes you continue to thrive for success. Just, if possible, try to limit the cost of your failures;-)

Janneke will be mentoring during the ucpoming E- & Mcommerce Program of Startupbootcamp that will kick off this fall. She will be providing the participating startups with her deep knowledge and expertise.