Startups are fragile, and early-stage startups are incredibly fragile. There are so many things that can kill your startup that your head will spin.
However, the five things I’m going to go over today are the most common problems CEOs encounter. I will also explain to you how you have to protect yourself so that they do not happen to you. Spoiler alert: none of them are money.
Lack of money is a symptom of other problems that a startup has. Money is rarely the cause of problems.
The five things I am going to explain today are the causes of early-stage startup failure. So, let’s start with number five on our list:
More than 50% of relationships with co-founders fail. And having a co-founder who doesn’t really believe is one of the two most likely reasons why a co-founder relationship doesn’t work.
I’ve seen this happen to many of the CEOs I’ve worked with. And it has happened to me too. Let me go over the details because I think it’s instructive.
My first co-founder and VP of Engineering, “John,” had resigned, and I needed to replace him quickly, or so I thought. I interviewed several people, and a month later, I hired “Julius” as the new VP of Engineering.
Julius seemed to fit in well with the rest of my team and we moved on. However, two months later, he called me one Sunday night to tell me that he was leaving because he couldn’t handle the pressure.
Pressure is what being a startup founder has. A founder who can’t handle the pressure doesn’t really believe in his mission.
The reality was that Julius wasn’t really into what we were doing. In a way, I knew that, but I went ahead with Julius because he needed someone in that position.
The good news is that usually the founder quits in the first nine months if they don’t really believe in what you are doing. So what can you do to protect yourself from a co-founder who isn’t interested in your mission?
Here are two things you should do:
A. Have lots of conversations with the potential co-founder about what they think of your company and the vision you have for it.
If there is not a good rapport between you and the potential co-founder, you should leave them aside.
B. Make sure your co-founder’s equity accrues over time.
The usual vesting schedule is four years with a one-year grace period.
The one-year difference means that capital is not accrued during the first twelve months of employment. As I just said, most co-founder relationships fail in the first nine months, so you won’t have dead capital on your cap table.
Let’s move on to number four on the list:
I am amazed at how many early stage businesses don’t have any budget or plan to manage their money. This usually makes you not realize how much money you are spending. So, you run out of money faster than you think because you have no control.
The solution is something you may not want to hear, but it’s what you need to do: Create a simple financial plan and budget for your startup.
When you make the budget, it will be like being able to see after being blind. And the good news is that it won’t take you more than a weekend to create a simple spreadsheet budgeting all your expenses along with your income plan.
One tip is to review and update your financial plan every month. You will become more precise as you repeat the process over and over.
Let’s move on to number three on our list:
Yesterday I was talking to the CEO of an early-stage startup, “Jerry”: he told me a story I had heard many times before. He had hired a development team to create his MVP and the team did not deliver the product on time. Worse still, he had already paid them their fees.
Now, Jerry was trying to get his next round of funding, and his company had not progressed enough to get the next round of funding. Versions of this story are all too common.
Here’s how to prevent it from happening to you:
CEOs of successful early-stage startups are almost always very detail-oriented. They don’t leave things to chance and get their hands dirty.
You should too if you want to be successful. Therefore, dig into the details. Ask tons of questions to your team members or contractors.
Finally, if you contract out development like Jerry did, make payments contingent on pre-agreed progress.
Let’s move on to number two on our list:
I hate hearing this. Many CEOs who ask me for help raising funds tell me that they are going to run out of funding in the next month or two.
If you wait up to two months before you run out of funding to start fundraising, then your chances of raising money are very, very small. Here’s why:
Raising funds usually takes an average of six months. That’s the average. I always advise CEOs to start fundraising at least a year before they run out of funding.
This way you have a margin, because there are many things that are beyond your control when you raise money. For example, the economy may falter or the market for your startup may have too many competitors.
In my case, it took more than two years to get our initial funding because we were raising money in the worst economic environment since the Great Depression.
Let’s move on to the most likely reason why your early-stage startup will fail:
I’ve talked to tons of CEOs who had this problem. And I had this problem too.
Think of your founder relationship as a marriage. Except you have the added pressure of trying to build a company with little or no money. Is it any wonder why so many founder relationships fail?
In my case, John and I couldn’t agree on how much money we should raise. John wanted to raise less money and I wanted more.
These types of problems can be discovered before the co-founder joins the company, simply by having open and honest conversations with them. I talked to John about many things before he joined the company, but I didn’t talk to him about this.
We recovered from John’s departure, but I obviously would have saved myself a lot of trouble and heartache if I had talked to him about what he thought of fundraising before he joined us.
I understand. It is very difficult to recruit people to join your mission to change the world. However, as you look back over my list, you realize that many of these mistakes could have been avoided if you had gone slower.
Make sure you and your co-founder are a good fit. Have the difficult conversations you need to have. It will take more time, but it will be worth it.
