These Are Some of the Most Common Mistakes of First-Time Entrepeneurs
This question originally appeared on Quora: What are the most common mistakes first-time entrepreneurs make?
I have more, but here are 10 scars I continue to wear from the 13 different businesses I have started:
- Failing to realize the importance of cash flow, not just profit, i.e., you need to maintain a moving 10- to 13-week cash flow forecast to survive. Stay liquid with your cash and beware of tying it up, because cash flow is more important than your mother.
- Failing to realize that the world was not starving, waiting for you to open, i.e., you still have to acquire your customer base, one way or another. Discounts, free trials, promotions are all needed to get a repeating and referring customer base.
- Failing to realize that, it is likely to take 18 months to three years to break even on your brilliant idea, let alone make a profit, i.e., you need more capital than just enough to cover infrastructure costs. You also need working capital to fund the losses during this period until your idea is financially sustainable.
- Failing to realize that successful corporate approaches are inappropriate for small business startups, i.e., you are in a fight for survival, not just playing your part in management committee decision making activities. A startup is not just a small version of a corporate enterprise, it requires a completely different approach in development, like business modeling not business plans, customer development not product development, and entrepreneurial, lean management not strategic/corporate management.
- Failing to realize that real margins are not just buy for 1 and sell for 2 (100%) but rather buy for 1 and sell for 10, i.e., you need greater profit margins than you originally thought to cover all the costs required to fund a sustainable business.
- Failing to realize that you need to be very good at everything, not just be an expert in one field, i.e., you need to be the generalist rather than the specialist.
- Failing to realize that you need to build a secure beachhead in the market before striking out for the main prize, i.e., do everything (compromise) to get traction in the market first--however small.
- Failing to realize that you are more likely to succeed creating an adequate product with brilliant marketing and distribution...rather than the other way round.
- Failing to promote benefits over features, i.e., customers buy what's beneficial to them and are blind to the exotic, outstanding and competitor-beating features that may have become your obsession.
- .... and finally, failing to be lucky when it counted most.
1. Keeping your idea secret.
This is one of the most stupid misconceptions about startup ideas (If I tell it to someone they'll steal it and make millions of it). The reality is that every loser has a business idea with a potential, but most are not capable of executing it. And people who are able to execute ideas have plenty of their own. Of course, it's the execution, not the idea--Facebook came after Friendster and MySpace, and Google came after plenty of search engines.
2. Trying to build a product for everyone.
He who tries to please everybody, pleases nobody.
3. Lack of focus.
All entrepreneurs are cursed with having too many ideas that are too tempting not to be executed. The point is to be able to put everything else aside and focus on the one with the best timing and most potential. Jack Dorsey mentioned somewhere that he had his Twitter idea almost a decade before he started it and put it in shelf--which is his way of clearing distractions.
4. Ignoring cash flow.
Confusing cash flow or ignoring it is the surest way to fail.
5. Quitting too early + not failing soon enough.
Quitting and failing are two different things. Failing soon is about not wasting time (or failing in love) with features, once you have enough evidence they aren't going to make profit--you should seek that evidence all the time. Quitting, on the other hand, is giving up to circumstances while knowing that what you are doing can work and will make you happy.
6. Wasting time on what competition does.
Someone once famously tweeted: "If you spend all your time looking at your competition, your product will end up looking like competition's ass."
7. Picking the wrong co-founder and not having a shareholder's agreement in place.
Talking or wishing and doing are to separate things. When you are motivated and excited everyone feels like a winner. All people tend to overestimate themselves. However once it comes to action, many back off or find reasons and excuses to go for the easy and safe route. Making sure you aren't giving equity to a "co-founder" before you get a proof is what shareholder's agreements are made for.
8. Issuing equity too early.
Many people you hire early on may only a half-hearted commitment and ambitions on their own. Once, I was going to offer a small part of equity to an adviser, and I had a chat about it with one experienced partner in a law firm. He told me: "Why would you need an adviser who does it for equity? Get people who are excited about your product and want to help out because of that excitement and belief in it. Then, after a year or more, you can talk about equity."
Same thing with stock options, the ideal time frame should be around five years, if you give it to someone after one year of working, they can simply walk away and take a free ride while you're working your ass off increasing the value of their stake.
9. Too many features, over-complicating.
Everybody knows why Apple was so successful. Here's a quote from Albert Einstein that sums it up nicely: Any darn fool can make something complex; it takes a genius to make something simple.
It's the simplicity, not complexity that sells (and makes it hard to build).
10. Not seeking or using customer feedback.
Well, they may not tell you what you should build, but they can surely tell what's wrong--as Bill Gates once famously said.
Having failed couple of times and now having a good healthy business, I can list five typical mistakes I made:
1) Build before selling (successful entrepreneurs sell before building). In other words, entrepreneurs should focus on the shortest path to cash (revenue and/or investment).
2) Overestimate idea over execution. Ideas are cheap, execution is everything.
3) Wrong partners. Each partner needs to put serious work hours and be or become an expert in his or her respective field. Idea in itself is worth less than 5 percent of equity.
4) Obsessed with building for cheap to the detriment of quality and time to market. In the software industry, this is very common. Some entrepreneurs think they can build a Facebook, Youtube, or Quora type of Web application for $60k. The sad part is, only once they've burned through $60k do they realize it was naive.
5) Underestimate the value of connection and networking.
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