Tips for Beating the Odds to Achieve Startup Success
A veteran venture capitalist and a seasoned entrepreneur share their experiences and mistakesand what you can learn from them.
PHOTO CREDIT: Getty Images
Randy Komisar is a venture capitalist with Kleiner Perkins Caufield & Byers, an author and speaker who focuses on early stage ventures. Jantoon Reigersman, CFO of Leaf Group, is an experienced financial operator in the startup and growth realms. The two recently pooled complementary experiences to co-author Straight Talk for Startups. We asked Randy and Jantoon to share their own entrepreneurial experiences and best practices to help startups thrive:
What was your biggest startup mistake?
JR/ I've made so many; it's hard to choose! The biggest was probably scaling my business before the product actually worked. It's a common mistake, especially in the technology industry. It is so tempting to believe you have a technology that works before it's proven.
I didn't ask the right questions. I relied too heavily on experts, who assured me that they could deliver, so we started to scale the organization. We increased our monthly burn rate and shortened the time until our cash-out date, all in a rush to support a product that wasn't ready. We forfeited our early-stage startup advantages of lead-time, nimbleness and efficiency.
What should I have done? I should have practiced "restrained urgency": prove the technology works, and only then scale your organization. My most painful mistake could easily have been avoided if only I had known better!
What advice do you give that is counterintuitive, but critical to startup success?
RK/ Before diving into tactics and strategy, we come back to our cardinal rulealways ask why: Why this? Why you? Why now?
It's remarkable how often these questions stump entrepreneurs. After a long pause, they may recite their vision, mission or simply say, "Because it will make a lot of money." But these aren't the answers we're looking for.
As part of your entrepreneurial drive, you should understand why this venture is important to you. Why it should be important to others. And, given the low probability of success for any venture, why, among all other opportunities and challenges at this very moment, your opportunity is significant and ripe for success.
A great entrepreneur needs to be bright. And tenacious. And passionate. But great entrepreneurs must also have something to prove. Something to rebel against. Some greater calling to fulfill. Be perfectly clear on why you are starting down this path before you take your first step.
What about social entrepreneurship and today's startups?
RK/ Entrepreneurship is important and relevant because it has the power to make the world better. That is why it's worth all the blood, sweat and tears.
The mission should be bigger than the bottom line. Entrepreneurs who focus on serving their customers rather than manipulating them are on the right path to benefiting society. It brings us back to the cardinal question: Why?
In business, you either create value or extract value. Entrepreneurs have the luxury to choose. Providing value to customers and stakeholders is the key to creating social value.
What are your ironclad rules around startup finances?
JR/ Financials tell a story; as an entrepreneur, you are the author of that story. It's imperative to master the details of your finances and business plan, including all interdependencies.
- Be keenly aware of "unit economics," the amount you make or lose on each sale, which effectively tells whether you have a real business or just a gamble. It is a common mistake to explain away negative unit economics by forecasting lower future costs. Most often this is just wishful thinking. Know exactly what threshold volumes will change your costs and how much capital you require to make the business work.
- As a rule, avoid venture capital unless you absolutely need it. It comes at a price: a meaningful percentage of your company, a host of governance terms and concessions, and the responsibility to deliver liquidity to investors.
- If you can find any possible way to self-fund growth, do so, because if your efforts prove fruitless, you can walk away easily. If instead you find traction, you will be better positioned to attract top-shelf venture capital on favorable terms.
- Never take money from strangers. Spend time getting to know any investing partner, not just the firm. Choose wisely and know what you are getting.
What three unique tips help startups increase their overall odds of success?
1. Make it personal. Entrepreneurs begging money or soliciting stakeholders tend to focus on selling the bottom line. They miss the chance to win hearts, not just minds. Startups are hard work and emotional rollercoastersyou need people around you who are motivated by the bigger picture and will persevere when things turn out differently than you hoped, as they always do. You need to sell yourself and your dream, not just the numbers--to great investors who want to invest in not only your idea but you, personally.
Tell them why you are obsessed by this dream, why they should be and why you have the right skills to be successful. Why you are the type of person they can trust and rely on. Go beyond the numbers to win hearts and minds.
2. Your venture has a local maximum. We've all heard about entrepreneurs who turned down attractive offers only to succeed far beyond anyone's expectations. What you seldom hear about are the far more prevalent stories about entrepreneurs who turned down a bird-in-hand only to go bust. At every stage of a venture, there is a local maximum--not the ultimate maximum, but rather, the most you can expect at a specific moment.
This is a critical concept because you have to consider the risks, costs and time it will take to get to the next stage of business. If someone offers you $1 million for your startup before it has a product or customer and you feel strongly that after product release it could be worth $5 million, that does not mean you should dismiss the $1 million offer. It may well be your local maximum rather than a low-ball bid.
3. Prepare for your lucky day. Building a business takes smarts, hard work and character. Excellence alone won't assure success. And no one succeeds alone.
The seldom-discussed X-factor in business is the ability to recognize when your luck has changed and seize the moment. Many hero stories about business success conveniently omit the lucky breaks. Did you know that Steve Jobs was desperately seeking to sell Pixar when Disney reached out with the offer to create Toy Story? Or that Apple was on the verge of buying another company when negotiations stalled and Steve Jobs swooped in to re-take the helm? Or that IBM was about to work with another PC operating system company but that Bill Gates jumped in with DOS when that derailed?
It's not just dumb luck; it's a critical business skill to prepare for and seize these opportunities. History would be very different today if these players missed their lucky breaks. Don't miss yours!