When we think of Google, Microsoft, Amazon, Apple and maybe even Ford, we forget about their humble beginnings. Most of the multi-billion dollar companies we know today and whose products we use, were started by a sole individual or a small group of individuals in a garage. Most of these companies in their humble beginnings have some common elements: a bright idea; smart, eager founders; and the willingness to take a risk – and maybe fail – but the fortitude to see it through.
Unfortunately, what we rarely hear about is the errors that start-ups make and the lessons learned that enable future founders to avoid some of those same pitfalls. I have had the opportunity to work with numerous founders and start-ups. Some were successful and others failed. What I’ve learned, and want to highlight, are a few key areas today’s and tomorrow’s start-ups and their founders should be aware of:
Corporate governance. When setting up the company, it is important to spend equal time focusing on governance, including the shareholder’s agreement. A shareholder’s agreement spells out the rights and obligations of the shareholders, rules around how shares of the company can be sold and to whom, the decision-making process and who has the right to make them. Governance is the constitution by which the organization is and will be led. It can be amended as needed down the road. But without it, the organization might as well be a bunch of lawless rebels.
Strength in diversity. In many cases, the inventors/founders have more of an engineering background and are less business minded. Having a board made up of people with different skill sets and backgrounds, including skill specific to the product or industry, business acumen, even leadership savvy, adds to the value of the company and greatly increases the chance of success.
Be prepared to pivot. Whatever you first thought the company should be, what if the direction or client base changes. Are you prepared to pivot? Think of Amazon. It began as a seller of college textbooks. Look at it today. Do you think this is what Jeff Bezos first had in mind? Be open to change and embrace it; if you stay rigid in your vision you increase your chance of failure. Bezos and his management team have made countless pivots and innovations along the way and today lead a very different company that today is No. 2 on the Fortune Global 500 list.
Branding. Decide on your message and your public face or figurehead. In the case of Apple, most people remember Steve Jobs for his big personality and for being a visionary; however, few talk about Steve Wozniak’s role in the Apple story. One leader can become the face – and mouthpiece – of the organization. In many ways, that’s good for public impressions. Additionally, it is critical to message your product well. Use the appropriate channels and focus on your brand’s appearance and recognition. Creating an attachment to the brand – an Apple, “golden arches,” the Tide detergent sunburst – will create customer attraction and longevity in the product. Just think of Coke and Pepsi, their following and their battle for first place in the soda wars.
It doesn’t have to be perfect. Too many times, I have come across start-ups burning their scarcest resource, cash, to create the perfect product. It’s been said “perfect is the enemy of good.” Getting the proof of concept out the door is more important than seeking perfection, which may come with time. Imagine if Apple didn’t release the iPhone until it got to version 14.
Raising funds. Many start-ups are boot strapped (i.e. they use their own money) until they get to a point that they need to raise money first from family and friends, then angels, and later, corporate money. When raising funds, ensure that non-disclosure agreements (NDAs) are signed before sharing any critical information. Don’t inflate potential sales; the truth will come out with performance. And ensure valuations are fair and can be backed up by your books. Finally, be smart about how you spend. In the days of the “dotcom” phenomenon, start-ups espoused the “churn and burn” philosophy, feeling compelling to spend their investor’s money. Finally, the raise isn’t there to cover your salary. It’s there to innovate and propel the company. Your salary will come with market success.
Investors vs founders. It’s often the case that investors have different objectives than founders. They may be more focused on returns and have a shorter time horizon than that of the founders, whose only focus may be to grow the company. This is particularly the case with private equity investors; their sole goal is a high IRR (Internal Rate of Return) for their investors. This forces them to exit from the investment in the shortest time frame possible, especially when there is a substantial increase in value, when founders have a much longer perspective. This doesn’t mean to shun certain investors. Just know how their and your goals align – or are misaligned.
Investors vs board members. Investors often want a literal seat at the table in return for their money. Don’t feel obliged to have your investors as board members. Some investors can just be investors. Build your board with people who will add value to the company. As mentioned before, investors may not have a long-term view and there is strength in diversity.
Creating a start-up is an amazing experience filled with suspense, excitement, and stress, and the outcomes can be exhilarating. Yet, in some ways, it’s a gambit; some statistics show 10% of start-ups fail in the first year – and 70% will fail by year five. To help ensure you don’t become a statistic – and make it to year six, get some independent advice. The Family Office Doctor is here to offer guidance, expertise, and a path toward success.