Research on the causes of entrepreneurial failure is often confusing and contradictory, but most investors and successful entrepreneurs agree that five common mistakes are potentially fatal:
Poor hiring. In young and fragile companies every hire is crucially important, yet also potentially dangerous, as many hires do not perform as expected. Bad hires waste money, disrupt projects, and degrade rather than enhance performance. Yet few entrepreneurs have experience in hiring. Nevertheless, there are three things that can help avoid bad hires:
First, precisely define the skills you are seeking in a candidate and create tests for determining actual - rather than claimed - levels of mastery. A skill is an ability to perform a prescribed task, usually under some level of stress that denotes the extent of mastery. Laying out home pages is a skill, as is selling, as is creating and managing hiring processes. Since most entrepreneurs lack experience in skill identification and testing, they need to ask for help and advice. Second, don’t hire the first or second person you find who might possibly fit your need. Put thought and effort into making a concerted search. There is no excuse for endangering your enterprise by filling a critical position with a mediocre candidate. Third, coach and train all new employees, irrespective of their experience and skill level, to operate successfully within the constraints and expectations of the culture.
Poor firing. You must also fire as effectively as you hire. You can never test perfectly someone’s skill level and cultural fit, and everybody changes with time, as does every job. Yet many entrepreneurs find it painful to fire people. But mediocre or incompetent performers hold back the enterprise, and firing them is ultimately in everyone’s best interests, including the person who must be let go.
Consensus team leadership. Most of the value in modern enterprises is created via teams. Successful entrepreneurs must lead, coach, and inspire their teams to meet very high expectations if they are to create superior solutions. Otherwise, you will simply achieve lowest common denominator (LCD) consensus. Team leadership skills come naturally to few people but they can be learned by almost anyone. They include relationship building, motivating others, and change leadership. No special traits are required to master these skills, although a trait like fear of confrontation makes mastery more challenging for some people than others. By demonstrating your own team leadership skills, you can justifiably set high expectations of superior non-LCD solutions for everyone else who will be asked to lead teams.
Ineffective transition from startup to growth. Startups begin life as one big project - finding some initial customers willing to buy a prototype product or service. Then you must deliver the product enough times to make sure such customers are genuinely happy with it and that many more potential customers can be persuaded to buy - thus confirming the business model. You must then lead your team to install robust, efficient, scalable, and flexible processes to perform the repetitive tasks required to reliably grow the business. Many entrepreneurs naively think they have the skills to design and implement world class processes, though they do not; or they assign those responsibilities to others who also lack the skills. This naiveté, or pigheadedness, brings down many startups and causes many entrepreneurs to be forced out of the companies they founded. The good news is that people who have the requisite process design and implementation skills can usually be found to work for fast-growing enterprises with savvy leaders who are good at hiring (and firing).
Failing to control the chaos associated with growth. Even after hiring a team of seasoned process designers and managers, entrepreneurs are often unable to align and control the hundreds, if not thousands, of activities that must be synchronized to efficiently operate and responsibly lead a fast-growing enterprise. Distributing clear responsibilities through all levels of a fast-changing organization requires all of the essential team leadership skills - relationship building, motivating others, and leading change - as well as project and process management skills. To maintain control, you must invest considerable time, effort, and skill to align expectations and responsibilities with each of your direct reports and with their direct reports. Then you must set the expectation that each of your direct reports will do the same with the people that report to their reports - in other words, another level down. Once expectations and responsibilities have been set for everyone at all levels, you need to confirm that the lowest level is working on tasks and projects as expected and that any misalignments are identified and fixed. Many entrepreneurs find this expectation-setting process boring, yet in its absence you cannot understand how your enterprise really works. And then chaos ensues.
These common fatal mistakes are all preventable, requiring only the humility to admit ignorance of processes like hiring or scaling the business, the willingness to seek people who are expert in such matters, and the determination to acquire the leadership skills that ultimately lead to the creation of the value.