Is this tendency particularly pronounced in younger entrepreneurs?
Very much so. There’s a brash, know-it-all attitude among younger people in general, not just entrepreneurs. And for those people, early success can be their worst enemy.
Sure, if you’ve come up with a good product, people will buy it. But are you able to look beyond the short term to the future of your company?
What kinds of mistakes have you seen startups make due to shortsightedness?
There are company founders who’ve cut exclusive deals early on that tie them up in perpetuity with one distributor or supplier, much to their disadvantage. Or they license something and get locked into a price that can’t sustain the growth of the company beyond a five-person startup.
I remember some guys came up with a technology they tried to license to a battery company. The problem was, the technology was designed to eliminate batteries! They were smart kids, but they didn’t realize that the battery companies wouldn’t love their technology.
The company tied them up in negotiations for two years, during which time they were prohibited from licensing their product to anyone else. They got sucked into one of those traps that you only know how to avoid through painful experience.
What separates successful entrepreneurs from those who get caught in traps?
The high-tech companies that have been truly successful have founders who are brilliant, but who learn to step aside and let professional management run things. I’m thinking of companies like Google (GOOG) and Yahoo! (YHOO), where the idea people realized they could only take it to a certain level. At the very least, the founder should consider bringing in a chief management officer to run the daily, detailed operations and a really good VP of marketing and sales early on.
Where else do young entrepreneurs go wrong?
They surround themselves with people their own age, all of whom may be the brightest people on earth, but none of whom have any experience. Five PhDs in a room does not necessarily make a successful company. It’s important for a startup entrepreneur to surround himself with people who’ve already done startups, who have grown them successfully and taken them public.
Here’s another one: putting too much trust into one person and finding out too late that this trust has been wildly misplaced. There was a company [founder] here not long ago who hired a CFO who was a friend, and [that person] ended up embezzling the company to death.
It doesn’t even have to be dishonesty, it may just be overestimating that person’s abilities. The more responsibility you put on one individual, the more it’s likely to break the company in two if that person fails. No one person should be indispensable, except maybe the founder, and even that situation can’t be sustained for long.
Anything else you see as a common source of failure?
Hiring yes-men who never challenge the founder. It doesn’t do jack for a company to put friends and relatives on the board of directors who can’t say, ‘You’re making a mistake here.’ I want people on my board who have the expertise and the confidence to tell me I’m doing something wrong.
How would you instruct a young entrepreneur with an idea for a great company to go about the process the right way?
First, make sure you patent the technology or get intellectual-property protection for the product, before you even talk to anybody about it. Then, get early-stage funding. If you have a few credit cards, you could max them out, which is how I started my company. You won’t get a bank loan without any company history unless you are willing to pledge collateral, like your house. I’ve known companies that started that way, but it’s incredibly risky.
Another option is finding an angel investor, who will put between $5,000 to $50,000 in a young company if he or she is convinced it has potential. Or, if you’re coming out of a university, you might get that institution to provide assistance or laboratory space. If your product is ready to be produced, you could try for an early order and cut a deal to get short-term capital up-front through that first sale. The terms won’t be favorable to you, but it might be worth it if you can get to the next stage.
Or you can approach family members and friends for small loans with long payback dates. Obviously, all of these approaches involve varying degrees of pain.
Once some early money is invested, what’s next?
Make a sale, preferably to a large company. Having a sale in place gives you tremendous credibility. You may have to cut a deal that’s more advantageous to the buyer than it is to you. That’s O.K., because once you have that first sale, you can go to a venture-capital firm and show that you have your intellectual-property protection in place and you have a major customer, and you’re ready to leave adolescence and become a grown-up company.
Some entrepreneurs are reluctant to accept VC funding because they will have to give up majority ownership. Are they wrong?
It’s worth it if the company really has the potential to be very successful. Having a VC firm invested in your company is not just about the money they put in. It’s actually just as much about the expertise they bring to your board of directors, their ability to help you close deals, and the network they have within your industry that provides you instant access to things like headhunters, printers, PR firms, professional managers.
You name a resource, and they can provide something that there’s no way you’d be able to touch on your own. And that can make all the difference.
Source: Business Week