A lot has been written about why startups fail. Most of the causes cited are external forces. Things like no market, competitive pressures, supply chain challenges, and lack of investor interest. Less has been written about how startups kill themselves. Internal missteps and self-inflicted wounds can be just as fatal as external forces.
Since a startup has all it can do to successfully navigate the external forces arrayed against it, there is little time or energy to deal with internal missteps. Here is a list of common self-inflicted wounds to avoid. If the startup has already suffered one or more of these wounds, the sooner it can treat the wound before it festers, the less chance it will prove fatal.
1. No intellectual property assignment agreements.
The people who have done ideation, research, planning, product development, marketing and/or creative work for the venture have not signed IP Assignment agreements. This includes friends, family, contractors, and the founders themselves.
If the venture does not have clear title to ALL of its intellectual property, it can prove fatal later. The people who performed work for the venture legally own it until it has been assigned, whether they were paid for it or not. Verbal agreements are not good enough. Good intentions are not good enough.
If and when the venture starts getting traction and raising capital, the startup should not be surprised at the number of people who come out of the woodwork to stake their claims. These wounds can be expensive if not fatal.
2. No legal entity to embody the intellectual property; expired legal entity.
The venture has not been incorporated, therefore, there is no entity to assign the IP to. A startup becomes a startup on the day it begins to create intellectual property. This includes the wireframes, features, and other plans and specifications for the product. It includes customer interviews, market and competitor research, business model canvas, logo, and other assets.
Waiting to create a legal entity that “owns” all the work the founders are creating can be fatal later. Number 1 and Number 2 go hand-in-hand. Legally protect the IP and embody it within a legal entity as early as possible, or risk losing claim to it.
The startup also needs to keep the legal entity in GOOD standing. Experienced startup investors are rarely surprised by how many startup entities have been involuntarily dissolved by the state because they did not file their annual reports or missed some other compliance requirement. IP agreements and other contracts made with a subsequently dissolved company are probably not enforceable. Good question for an attorney, but in any case, will cost the startup a fair amount of money to fix.
3. Large number of founder shares issued upfront. No vesting. No Buy-Back agreement.
Two or three buddies start a company and issue themselves one million shares of stock each (or other absurdly large number of voting shares). After a few months one of the founders leaves to take a job. Another one hangs around but doesn’t do much of anything except complain. There is no way for the remaining, dedicated founder, to claw back the issued shares from his former buddies.
Scenarios like this are common in startups and usually prove fatal. It becomes impossible for the venture to correct its cap table, attract needed talent and investors. It often ends up in a legal battle, fighting over nothing except pride.
All shares issued to the founders should vest over 3-4 years based upon pre-agreed performance milestones. The founders should have a buy-back agreement that gives the company the right to cancel unvested shares and buy back vested shares, in the event the founder leaves, dies, becomes incapacitated, or is otherwise unable to fulfill his or her role at the discretion of the board (which should consist partially of one or more seasoned professionals who are not founders).
4. No division of labor and/or accountability among the founders and other team members.
Two founders are co-Presidents. They both focus on marketing because that’s what they know. Everyone else is responsible for everything else and no one really knows who is doing what by when.
As silly as this sounds, it’s a common scenario in many startups. There is no one boss, driving deliverables and holding everyone involved in the venture (including contractors) accountable for accomplishing specific tasks on deadline. There is a lot of thrashing around and finger pointing. No one wants to have the hard conversations about control, management, and accountability. After all, no one wants to hurt anyone’s feelings.
Startups are not democracies. At best, they are benevolent dictatorships. ONE person must be in charge day-to-day and make decisions when there is not a consensus among the founders or extended team. Everyone in the venture must have a defined role and be held accountable for very specific deliverables (see the next item).
5. Strategy of the week. Working on the wrong things in the wrong order.
The founders spend most of their time working on their branding and pitch deck. Yet, they have no functional product or business model. They are looking to recruit a CFO. Yet, there is no money to count and won’t be for several years. They are interviewing sales people or outsourced sales agents. Yet, they themselves have not talked to any customers or made any sales. Worse yet, the team as a whole spends an inordinate amount of time on administrative tasks, unproductive meetings, and useless reporting (see the next item). The vision is murky. The strategy changes every week. There is no written plan.
There is a logical sequence to starting and growing a company. Call them stepping stones. It’s counter productive to jump from stone 1 to stone 10, then back to stone 3, and so on.
Not having a clear vision, good strategy, and workable plan (even though these things can and should change as milestones are hit or missed), is usually fatal. Contrary to popular myth, successful founders don’t make it up as they go.
Not knowing the most important and immediate issues to resolve every day is usually fatal. It leads to burnout. It leads to misalignment between vision and execution. It leads to reinventing the wheel and wasted effort. It leads to more serious internal conflict.
Vision, strategy, plan, and proper prioritization and focus are paramount in a startup.
6. No metrics. Measuring the wrong things.
The founders are obsessed by getting press and likes on social media. Yet, those activities are not producing a better MVP, new users or revenue. The webmaster is measured by how many views the website is getting. Yet, no one is tracking how many views translate into engagement, or engagement into leads, or leads converted to sales. No one knows the cost to acquire a customer, the life time value of a customer, or their average spend. No one knows what percentage of revenue comes from repeat customers versus all-new customers.
In any organization, what gets done is what gets measured and rewarded. In large companies, these things are often pointless and subject to the whims and vain objectives of the boss. Startups cannot afford to measure or reward the wrong things. Doing so can be fatal.
In a startup, the metrics can change very quickly as the venture develops. What should be measured also changes much more rapidly than in an established business. Closely tracking the right metrics and adjusting the vision, strategy and plan accordingly, is a key skill set all leaders and advisors of a startup need to acquire and perfect.
7. Sacred Cows. Un/coachable and un/scalable founder.
The CTO is a co-founder and in love with a particular product (or feature). The vast majority of customers don’t like the product, don’t buy the product, or don’t use the feature. The CTO refuses to kill it and keeps devoting resources to it. The founder has all the answers and is easily offended when someone suggests things be done differently. There is a complete lack of transparency about problems and issues between the leadership and the rest of the team, or the startup’s investors. The company’s culture is uninspiring or borderline toxic.
Most startups talk about being repeatable and scalable. They are building something that can be mass produced and sold to a very large market. It is not constrained by geography or human resources. But the most important thing that needs to scale in a startup is the Founder/CEO, and the rest of the leadership.
A scalable founder/CEO is one whose role changes, whose weaknesses can be balanced by other’s strengths, who delegates, can build a team, and attract good advisors. A scalable founder is one who can relinquish control, graciously accept and act on constructive feedback, and continues to grow as a person and professional.
Mike O’Donnell is the CEO of StartupBiz.com and the author of Startup Stepping Stones: Actions and Resources for Launching a Viable Business. He mentors for The Venture Mentoring Team, The Founder Institute, and SCORE.