Confessions of an Entrepreneur: The Biggest Mistakes Company Founders Make
April 23, 2021 | By Mark Zweig
As a student of business for most of my life, I have seen it a lot. A lot of businesses created that didn’t achieve their potential — and many that didn’t make it all.
While the economy and the pandemic have received more than their share of blame for business failure, more times than not, that failure is not based on external environmental conditions. It is based on mistakes the founders of those businesses make. Here are some of the most common ones:
- Hiring friends and family.
- Immediately looking for equity capital.
- Getting equity capital from people who don’t understand your business or industry.
- Using precious capital to buy assets that could have been financed.
- Making big fixed overhead commitments too early before there is any sense of how the business will do.
- Vastly underestimating how much needs to be spent on marketing and promotion for the business to gain traction.
- Not testing the product or service adequately with consumers.
- Not forming a board of advisers who can help the business get off the ground.
- Not getting a partner who is completely different.
- Taking too much money out too soon.
The seeds of future HR problems are sewn right here when you hire friends and family members and other people who will work cheap. The inevitable breakdown that occurs when people who are not qualified and have personal relationships with the founder — who are unable to perform their jobs — compromises virtually everything the business is trying to accomplish. Then you have the additional problem that hiring relatives — in particular — causes with the rest of your employees when the perception is that .
Why give away your business before you have even started it? I really think the popular media has promoted this notion that once you’ve got your idea for a business the next thing you are supposed to do is look for capital. It isn't!
The next thing you really need is a good business plan — one that minimizes the amount of capital required to get the business going and prove its viability. With the right business idea and the right plan, you may not need any outside capital.
This is almost always a mistake, also. If the investor is purely financially-driven, they won’t share your passion for the business and probably won’t see the opportunity for what you are proposing as clearly as you do. This could mean they will want you to do things that aren’t in the best interests of your business over the long haul.
People who do understand your business and industry, however, may be able to provide real help and insight that you will need. They may also have all manner of connections that could help your business succeed — including possible clients and/or customers, sources of supply, and valuable connections with regulators or government authorities that could be pivotal.
For example, I recently had a client tell me about a potential private equity deal they had been approached with. While the valuation was impressive, the best aspect of the potential deal is the guy heading the fund came out of the very same industry and specialty of their business.
The odds of long-term success are so much better in a scenario like this.
I always like to use the example of two individuals I knew who started an electrical contracting business about 8 or 10 years ago. They had $27K between them which should have been adequate starting capital for what they were trying to do. The first thing they did was buy a new truck and pay cash for it — $25K at the time — which then meant they had no money to do things such as pay for the materials they needed to do a job. It resulted in their failure within a year.
This, too, is so common. The overly expensive retail space, too much office space, or worse — buying a building right out of the gate when there is absolutely no idea what demand will be and how much or how little space will be needed. The same applies to hiring too-expensive people too early in your development.
Farm out everything you can to keep costs low and fixed commitments to a minimum!
I see this more often than not. Founders who cannot see that tackling huge problems where the whole world is a potential customer takes a tremendous amount of marketing and promotional dollars to get any traction in the market. So they don’t spend it — and don’t get it, either.
I suffered from this one myself with a business that I co-founded with two other partners. Our majority owner and inventor of our products thought he knew better than the customers we were targeting on what their needs were. He refused to have focus groups made up of target customers. As a result, one of our products completely missed the mark as our customers did not like certain aspects of it. I suspected we would have some problems there but his unwillingness to consider customer input was a big part of our eventual downfall.
The board of advisers is one of the most affordable and best ways to get effective mentoring and sound advice if you pick the right people – those from your industry, those who have been in the same business, those who work in potential client or customer organizations and those who have experience you can benefit from are the best candidates. Many will work for free or for a few thousand dollars a meeting.
This could be a bargain if you get successful people in their fields.
Most of the time founders end up as partners with someone who is just like them. That is a huge mistake, and will undoubtedly lead to role conflict and possibly relationship problems — while at the same time ensuring that certain skill or orientation deficiencies when you have very little to spend on talent don’t get addressed.
The best partners in my experience are those with similar values but completely different backgrounds and skills. Then they each have a more natural role that is less likely to result in conflict. Conflict amongst founders is not usually productive!
The business is the goose that has the potential to lay golden eggs. If you ever want to see those “golden eggs,” taking care of the goose is your number one priority. It needs all the care and feeding you can give it. If you starve it or don’t keep the heat on, or worse yet, eat it, you will never see a golden egg. Don’t take too much cash out of the business because your personal wants and needs are too high.
So, there you have it. If you are a company founder, how do you think you stack up? And if you have any mistakes you want to add to my list, please do so!