Updated: Nov 28, 2018
Lean startup, agile, SCRUM, the list goes on. There are a plethora of books, guides, lists of 5 or 10 key points and organizations for founders of startups to learn from. From my experience both as a founder and as a Business Consultant, Coach and Mentor, is that little to no-one is teaching (including MBA programs), entrepreneurs how to make the “best of the worst decisions”. Yes, you read correctly.The thing about most startups is that there typically are some common challenges such as, in no special order and may not be limited to are; funds (working capital), talent (employees) and traction.
Even in the case of a tech startup with an MVP, Pitch Deck, Executive Summary and Business Plan in hand — the issue of resources combined with a low reputation (credibility) and/or a first time entrepreneur results in a startup working extremely hard to raise funds. Along the journey of building sales, distribution, partnerships, traction, revenue and proof of concept, the startup will often make compromising decisions that in the long run - can be extremely harmful to the business. I have seen it all too often as it is a horrible feeling for a founder who knows better, but is in a corner and has to make “the best of the worst decisions”.
I cite multiple examples that founders may fall into, regardless of having a plan, strategy or being “agile”;
Early stage investor supplies funds to the startup that is unreasonably favourable (to the investor) that can include a board seat, stringent milestones with penalties if not achieved, disproportionate shares and/or voting rights etc. I have even seen situations where a startup was forced to accept an individual to be hired as part of the financing deal. Good luck on firing such a person if this individual does not add value or perform as needed or expected. Sometimes there are conditions such as being forced to us an investors contacts as a supplier — again, this can cause a whole new set of problems.
Registering for a patent without long term planning. Once the process starts the company will need to have sufficient funding to protect the patent beyond its country borders. More often than not, startups end up months before the deadline to pay for the patent fees after the patent pending stage. In many cases, potential investors may pass on the investment with the hopes that the startup will fail to raise the required funds, in the hopes that they can access the patent for free as it would become public knowledge. I have also seen instances where founders will desperately try to raise the money to save their patents, leading to a very very uncompromising position when negotiating with an investor or lender. Very often, the startup will put up the patent as collateral and will be at risk of losing it should the startup fail. I have seen many companies lose their patents from this type of deal.
Sweat equity in lieu of salary is another problem. I have see overly eager startups who regretfully issue shares away to employees and even a so called “partner” without a clawback provision so if the individual(s) leaves, they still end up holding shares (equity) in the company.
VC firms who’s strategy is a “win win”, but for them only. This essentially means that they have the balance of power and can even have the founder and CEO of the company ejected from his own company — I have seen this happen all too many times. Aggressive VC firms will structure a deal whereby there are milestones and timelines to be adhered to and should the startup fail to achieve them - penalties such as additional (free or minimal cost) equity goes to the VC firm. Another example is where the VC firm will penalize the startup if the company goes “back to the well” for additional funds. The VC firm may elect to provide the funding, but at a very high cost to the startup which again means equity, an additional board seat, a member of the VC firm will be involved in the day to day activities of the company and with greater say or influence… This is one of the reasons why I will suggest a startup to understate and over deliver. Many times startups over estimate their deliverables and in doing so fail to factor “Murphy's law” into the planning where “anything that can go wrong will go wrong”. Often this can be avoided with better planning — this is a given…. but the other is to slightly over estimate costs and have a slush find for the “just in case shit happens”. With that extra amount of money, a startup could use these funds to hire additional individuals to pick up the slack as one example.
There are so many more examples, but I hope you get the right idea of where I am going with this. I remember speaking with a peer of mine who is a professor in a university MBA program and business consultant and coach, where we were discussing these and many other issues. I recall him telling me that we should create a case study or develop a teaching module to help educate students and startup founders about these pitfalls and how to reduce the chance of falling into them, or how to better plan or navigate through them. Making the “best of the worst decision” in a startup is something that most first time entrepreneurs have to deal with. It would be amazing if every founder would have access to an experienced business coach, consultant and/or mentor to help them along this journey. The problem with a startup is to find such am individual and even if they did, how would the individual be compensated- right?
So here some thoughts on this subject, please feel free to share your thoughts as well:
Plan carefully and do your research thoroughly.
Try to find a lawyer and/or accountant to be part of your startup.
Grow your business methodically, carefully and only scale quickly if and when you can effectively manage the growth.
Try to find a seasoned and experienced business partner as a cofounder. This can help reduce some problems that can be attributed with young and or inexperienced entrepreneurs or first time executives in leadership role.
In your planning and budgeting stage, include hiring a business consultant who also provides coaching and mentoring — better if the person has startup experience as well.
I think that everyone should be using a Business Coach who is a seasoned business consultant as well. If one were to calculate the cost benefit of paying for such an individual, it would actually save the startup more money in both the short and long term of the business. If your startup lacks the funds or has limited funds, then propose to the consultant some equity and or some other creative ways to engage in the consultants services. Who knows, sometimes an individual will agree as we tend to have a small portion of our time allocated for startup opportunities, especially for consultant who specialize in startups like myself.
Thank you for reading, and do feel comfortable to ask me any questions or send me any comments if you like.
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