Startups: Avoid irrational exuberance

You have read “Start: The Starters’ Playbook.” You are ready to charge ahead with starting a business. Remember, agility and enthusiasm are good. Recklessness is not.

Many novice founders, convinced that their startup is the next Unicorn, make serious mistakes due to over-optimism. Avoid making such mistakes. Learn from others’ experiences, failures, and successes and not fail. Some say that failures teach us a lot. Several people have written about the virtues of failure—it builds character, a necessary path to tremendous success, and so on. Do not believe it. Just ignore it.

One life may not be enough if we try to learn everything by experiencing it. You can learn from other people’s failures but have no reason to embrace them. If other people cannot move fast enough to adapt to new technologies …it is their problem. If other people cannot negotiate skillfully, it is their deficiency.

Another cliché is “learn from your mistakes.” It has limited value. It does not show you the best next step or what to do next. The only thing it tells us is what not to do again.

How about learning from your or others’ successes? Now that is of real value. It tells you what works, and you can build on it by doing it again. You will do better next time. Focus on what works, the triumphs. You build upon your winners and not failures. Success is the best building block. When starting a business,

Avoid:

Betting the farm

Starting a business is a risky, long, and arduous journey to success. As meticulously described in the book, “Start,” astute and successful starters take well-calculated risks and avoid OPM (other people’s money). Before you stake everything, get customers. A founder without a minimum viable product and no real customer commitments should take caution. Check your enthusiasm for unsupported optimism. Avoid putting everything, yours and others, at risk.

Often it is not wise to devote 100 percent of your time to the venture while consuming personal savings. Numerous founders have been running their startups while keeping their day jobs.

Forecasting long durations

As a managing director at a venture capital company, I listened to numerous entrepreneurs confidently project $XXXM in revenue over three or five years, including cost estimates.

My response? Five years forecasts are a shot in the dark. All longer than one-year projections are guesses. Waste no time on false precision. Focus on the burn and your path toward achieving near-term milestones instead of false precision for the longer term.

“How will you get the customers in the first few months or quarters? How do you expect to grow from 5 users to 50 users? Over how long? And how will you keep them satisfied? Better still, how will you get that one large client in the first few weeks or months? How will you bootstrap when starting out?” Near-term details matter more than unproven and unsupported assumptions. Since planning is mostly guesswork, focusing on this week rather than this year is better. Figure out the best next thing and do that.

In daily life, how often are our time estimates accurate? The dealer estimates one hour but uses the whole day to service my car. I counted on writing one chapter of my book in just a few hours. It took me the entire week to write it. Sometimes, it is the opposite. I scheduled eight hours of online negotiation skills training for six executives. It ended in about six hours.

Most of us suck at forecasting and estimating. Even with simple tasks, our forecasts are off. We can’t accurately forecast or estimate a few hours or days; how can we expect to predict longer projects accurately? Often, we are not just a little off–we are way off.

Break up your forecast and estimate periods into smaller durations. Instead of one six-month project, design it as six one-month projects.

Wasting your cash

Some founders engage in costly, premature, and unnecessary activities. The startup’s resources should focus on customer acquisition, developing the minimum viable product, and a viable business model. Ignore expensive patent applications, at least early on. Similarly, premature investments in preparing detailed business plans, complex financial forecasts, and fancy presentations may shorten the runway and prove futile, as these change dramatically over time.

Refrain from paying cash upfront to intermediaries for leads to potential investors. If you must use intermediaries, pay a modest finder’s fee if the deal materializes.

Equity give-away 

Be cautious with equity and stock options allocation. These should be commensurate with value and results.

Sharing some of the pie to increase its size may make sense. But think ahead, even before setting capitalization tables, about how much equity to keep for the future. Some ventures may require several rounds of financing. For them, premature dilution has two risks: First, too little equity will be left for future investors. Second, later-stage investors prefer not to invest in a venture whose founders do not have enough equity left to motivate them.

Seek:

Experienced board members

A ‘mastermind’ (a think tank of trustworthy people) or a board of advisors will do until it is the right time to nominate a board of directors. Getting feedback from experienced people before making critical decisions about partnerships, investments, and significant changes is vital.

Professional services

Some actions may be legally binding, so talk with a lawyer about the “do’s and don’ts” before taking seemingly innocent steps (such as sending an email that details future equity allocations). Similarly, consult with accountants or tax advisors before registering a company, and meet with patent attorneys when relevant.

The advice of successful entrepreneurs you know

Only some startups make it big, so you must minimize your mistakes to succeed. Before making decisions, ask yourself: What would a successful person I know do?

Understanding of the longer-term impact 

Will the short-term gain of hiring a service now compensate for the negative impact on the longer-term runway?

I would love to hear about your experiences! Please share your stories here.