Discover more from Coding VC
Early-stage Startup Mistakes
Over the last fifteen years, I’ve been involved with a lot of tech companies. I’ve worked at 6, invested in ~20 (either personally or through my fund), and researched hundreds in-depth. Most of these companies were startups with 1 to 50 employees. After seeing that many companies up close, I’ve noticed a lot of recurring mistakes.
The following is a list of the some of the most common and most damaging problems that I’ve seen – and suggestions for fixing them.
Problem #1: A focus on optimization before finding product-market fit
Some founders run UI focus groups or spend months on performance tuning only to eventually discover that they weren’t making a product that people needed. There’s no point in making software fast or pretty if no one is going to be using it.
Solution: Prioritize launching, getting feedback, and learning, above UX optimization, performance tuning, or anything else that may not be necessary if your product doesn’t get adoption.
Problem #2: Premature bureaucracy
If your company has 9 people, you shouldn’t need formal biannual performance reviews, nor should you require sign-off from three VPs to push a feature to production. Bureaucracy kills morale and contributes to attrition – especially since many employees are initially attracted to startups because they want more freedom and less formality.
Solution: Err toward simplicity and implicit trust. When it comes to adding new processes, regulations, and rules, ask “Why?” – not “Why not?”
Problem #3: Too much money in the bank
Anecdotally, most startups should aim for about 15-20 months of runway after their seed rounds. Having more money (due to an oversized seed round or wealthy founders) can kill the sense of urgency that drives rapid innovation. When you’re thinking about the size of your seed round, consider that a Series A can take up to 3-4 months to raise, and you’ll want to show good traction for the 2+ months before you start fundraising. This means that 15-20 months of runway gives you 10-15 months to figure out a viable product. That’s usually short enough to feel pressure to find product-market fit, but long enough to experiment and learn and find that fit.
Solution: Aim for the amount of funding that you think will give you time to find product-market fit, but not too much more than that. For most startups that’s about 18 months.
Problem #4: Too little money in the bank
Per the previous point, raising a Series A takes time. If you need 5 months for traction and fundraising and you only raise a 10-month runway, you’re going to have very little time to find product-market fit. As Tomasz Tunguz explains in a recent blog post, startups that don’t raise a significant enough seed round have a significantly lower chance of raising a Series A.
Solution: When you raise your seed round, make sure you have at least 12-15 months of runway in the worst case. (Worst case = no revenue and gradually increasing costs.)
Problem #5: Many pilot customers but no paying customers
Getting 50 pilots is not a sign of progress if none of them convert to paying customers. It’s much better to get 5-10 pilot customers, and then to iterate on your product based on feedback until your pilot customers are willing to start paying you.
Solution: If you reach a point where you have dozens of pilots, start focusing on converting existing pilots to paying customers rather than signing up more trial customers.
Problem #6: The dismissal of all advice
Advice can be a double-edged sword, but it’s wise to consider the lessons that smart, experienced people share with you, even if you eventually decide to ignore those lessons. The best founders, engineers, and PMs that I’ve worked with have all been great listeners. The worst part of being a bad listener and shooting down other people’s ideas is that people quickly stop coming to you with ideas.
Solution: When someone with relevant experience offers advice, just listen and thank them. You can decide later whether or not to follow it, but do not dismiss advice just because it wasn’t your idea.
Problem #7: Territorial management
A 1000-person company can afford to waste the work of 20 people because several directors are having a turf war. It’s not ideal, but it’s tolerable. On the other hand, a power struggle at a 20-person startup can easily consume 15% or 25% of a company’s total output. Given the time pressure that young startups face, that can prove deadly.
Solution: Don’t tolerate people who put personal glory ahead of what’s best for the company. This holds at any stage, but especially when your company is small.
Problem #8: Stealth mode
While it occasionally makes sense to work on a startup in secret, ”stealth mode” seems like a waste of effort most of the time. First, it’s unlikely that people really care about what you’re working on until you release it into the wild. Second, being secretive makes it harder to recruit employees and to get inbound leads (for B2B companies).
Solution: As with bureaucracy, default to “no” rather than “yes” when it comes to stealth mode.
Problem #9: Disconnect between employees and management
Sometimes the CXOs are all friends with each other and there’s no way to complain to one of them without the complaint getting back to the target. If you think your CTO is doing a bad job but the CTO and CEO are best friends, then you won’t talk to the CEO because you know the CTO will immediately find out.
At other times, upper management runs a man-in-the-middle attack between the CEO and the lower level employees. The CEO gives directions which are modified by management without his knowledge. Later, employees complain to management, but management doesn’t pass those complaints up to the CEO. The CEO doesn’t understand the discrepancy between how the company is doing and what his staff tells him; the employees get fed up with poor management and the lack of direction and begin to leave.
In each of these scenarios, the top brass has no idea what’s really going on in the company and the company slowly implodes. It’s very hard to resolve issues when it’s next to impossible to bring those issues to the surface.
Solution: There should always be usable communication channels between the people at the bottom and the people at the top of an organization. Annual employee surveys and venues for anonymous feedback make it easier to surface problems before they grow too large to fix.
That’s my list. If you know other common mistakes that should be on this list, please let me know on Twitter.