3 mistakes still seen too often in startups

At Dovetail we design, build and invest in technology companies and in the process we’ve learnt a few lessons about what works and what doesn’t.

In this article we’ve tried to focus on three mistakes that are relevant to early-stage founders. Mistakes that we still see surprisingly often and which we believe almost always have negative consequences for the company.

Not enough focus on sales and marketing

We’ve all heard about the folly of believing that “if you build it, they will come” and if you look at the founding team of most startups they are still predominantly built around engineering and product with sales and marketing often being limited to a line item in the business plan.

Yet without a cheap, effective, scalable way to acquire new customers your startup will not be able to succeed.

Especially in the beginning, the very process of selling not only brings in revenue; it puts you directly in front of your target customers. By spending time in the trenches selling your new product you will quickly learn:

  • which parts of your product excites your customers
  • which features they wish you had
  • what they find difficult to understand or to use
  • why they are considering your company over your competitors

Ultimately it will help you test if many of your initial assumptions about your target market are correct and can help ensure that you steer both your product and company in the right direction.

Can’t you get this information using focus groups or by just meeting industry people? Potentially, but people have a nice but unhelpful tendency to tell you what you want to hear in such an interview. If instead, you try to sell a target customer your product you’re likely to get feedback that is much more frank and honest (and hopefully a customer). This feedback is so critical that the sooner you can get it the better. Many businesses should be trying to sell their product before it’s even built. If you have visual prototypes, that can be used to sign up customers in advance. Offer them a discount, offer to build them a particular feature (if you think it would also be useful to others), do whatever it takes to start bringing in paying customers and beta customers so that you can hit the ground running when you’re ready to launch.

There is no one-size-fits-all for how to build out your customer acquisition strategy, but an important consideration is that your customer acquisition strategy must make sense for the LTV of your company. If you’re selling a $10/month SaaS product then you don’t have the option of using a direct sales strategy as a long term driver of growth. Think about how much it costs to hire a salesperson. How many new customers can they bring in a month? If you’re only charging $10/month then you’ll be paying more to acquire your customers than you get in return. You might still want to do some founder-led sales in the beginning to gather feedback but it can’t be a part of your growth strategy. In that case, marketing and PR are more like to be the key driver. If you’re selling an enterprise software product for several $100k per customer then direct sales might in fact be the most effective way to bring on new customers.

Not having a vesting schedule in place

Having co-founders can allow a company to be started with multiple highly skilled individuals that would otherwise be hard to attract and retain by a small startup (ideally from different segments of the business: technology, sales, marketing etc).

It’s important to remember however that most new companies will at some stage go through difficult times. All companies do. By the time those difficult times come around the personal situations of the people involved will often have changed, their attitude to risk might have changed (as happens when people start a family) and there might have been a divergence in strategy that is favoured by one or more co-founders and not the others.

Being a co-founder is like being married and like marriage sometimes there will be a divorce. If a co-founder owns 50% of the business and decides to leave, he/she will continue to own 50% of the business but will no longer have any obligation to help that company achieve success. Co-founders most often leave when times are tough, when sales are slow, when cash in the bank is running low, when the product is falling behind, when key customers are talking about leaving. They also often serve critical functions in the business. Therefore when a co-founder leaves and takes 50% of the shares with them, the business can find it itself in an extremely difficult situation of having to try and replace this person but without being able to offer shares as an incentive. A vesting schedule fixes this problem. It serves as a prenup for co-founders.

The particulars of how a vesting schedule should be structured is for you and your co-founders to decide. A typical 4-year vesting schedule where you each get allocated 25% of your total shares each year for 4 years might be fair in your situation, or it might not. The important thing is that you have the conversation upfront, discuss the potential scenarios and put a system in place that will be fair for both co-founders and your shareholders in case one of the less favourable scenarios was to occur.

Picking the wrong industry / business idea

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Warren Buffett

Some brilliant founders manage to pivot from a mediocre business idea to a brilliant one, but more often investor capital and co-founder/staff patience will have been exhausted by the time it becomes clear that the initial business idea was the wrong one. Therefore it’s vital to try and get the core industry and value proposition close to the mark on the first go.

Some of the common mistakes we see when people evaluate industries and business ideas are the following:

  • Ideas that only work at scale. There are lots of product ideas that would be great if everyone used it but unfortunately don’t really offer much value when the product has few customers. Since there is no value for customer 1, 2 & 100 it’s unlikely that the business will ever reach the scale it needs to be successful.
  • Lack of unique selling point other than price. No-one would ever try to start a car company with the intention of selling high-end cars at 20% of the price but in software many ideas are essentially that. Sometimes existing products are overpriced but more often once you factor in realistic customers acquisition costs, realistic engineering costs of managing a large customers base, and marketing costs it suddenly won’t seem as overpriced anymore.
  • Low margins. Most often low margins are the result of too much competition, which at best is likely to lead to lots of revenue but little profit.

The ecosystem for starting a company has never been better than it is today so if you’re venturing along this path then we hope some of these lessons are useful to you. If you have any questions or would like to talk in more depth please feel free to reach out to us at hello@dovetailstudios.com or visit us at https://dovetailstudios.com