18 Ways to Kill a Startup: Bad Teams and Ideas, Arrogance, and More

3/28/14Follow @MichaelXBD

How can you screw your startup? Let us—and Jason Mendelson—count the ways.

Mendelson is a managing director of the Foundry Group, a venture capital firm based in Boulder, CO, and he knows startups. As a VC or mentor, he’s worked with hundreds, so he’s seen up close what works and what doesn’t.

Mendelson focused on the latter during a presentation Monday at the Boulder office of Techstars. He ran through a list of “18 Things That Can Blow Up Your Startup.”

“These are literally things that could screw up your company past the point of no return,” Mendelson said. “This is a list of mistakes that if you make them, you have a very, very, very good chance of not recovering.”

Here’s the list, with some choice quotes on a few of the points Mendelson stressed especially hard. Take note, because in his eyes most of these mistakes are not fixable later on and will permanently harm—or even doom—a startup.

1. You pick a bad team. The first item might seem obvious—no one tries to get the wrong people—but it’s still worth repeating.

“The first three or four people you hire will definitively set the course of your company,” Mendelson said.

He believes that when founders agree to work together or assemble their teams, they should focus on the people’s traits and personality over skills.

“You want to think culture first over competence—that is one thing you must always do,” he said. “If you have the wrong culture, you’re dead.”

Mendelson also cautioned against hiring talented people who can’t work with others or who disrupt the team dynamic.

“High-performing assholes are still assholes,” he said.

2. You pick a bad idea. There are a lot of startup ideas that won’t succeed because they’re “definitively bad ideas,” Mendelson said.

On the other hand, the idea could be a good one, but it has to be the right fit with you.

“If you’re not psychotically passionate…and emotionally connected like it’s the love of your life, it’s a bad idea for you, because you’re not going to have the intestinal fortitude to go on,” Mendelson said. “Don’t start for the money. Don’t start for the prestige. Start because you have to solve a problem or you can’t sleep at night.”

3. You pick bad advisors. Startups will need some professional advisors, like lawyers and accountants. But they’ll also find informal advisors, and that’s where things get tricky.

Mendelson recommended finding out potential advisors’ reputations. It not only helps you determine their credibility, but they’ll want to protect it, and that desire means they won’t mistreat you.

“Make sure that anyone you’re talking to has what I call a reputation constraint. Whoever you talk to should have some pain inflicted on them if they treat you poorly,” Mendelson said.

He also noted that if you agree to compensate an advisor, compensate them with equity.

4. You are arrogant. Arrogance is a huge turnoff, in all its forms.

“That can be intellectual arrogance, it can be emotional arrogance, or it can be the arrogance of Kanye West,” Mendelson said.

Arrogance blinds people, but it also is corrosive to relationships in the long run. That matters a lot to VCs, who can have relationships with companies that can last up to 10 years.

In addition, mentors and investors have been in the game a long time and amassed a great deal of knowledge about how things work. They want to share that to help startups they’ve invested time or money in succeed. If entrepreneurs aren’t willing to learn, it can be a deal breaker, Mendelson said.

“If I don’t think as a venture capitalist I can teach you, I have no interest in doing a deal with you,” he said.

5. You don’t have a business model. Business models can be changed over the course of a startup’s life, but founders need some vision of how they’ll make money. Investors expect to see some plan, and they know it can change over time, but it’s a good way to see how an entrepreneur thinks.

“At least have an opinion. We all know it’s wrong, but have an opinion so we can see how you think analytically,” Mendelson said.

6. You don’t understand your competition. “People get so locked in to the competitive view that ‘I’m doing X, and I’m going to look at all the competitors that are near to X,” Mendelson said. “Think broadly about your competition.”

Mendelson gave the example of Zynga, which the Foundry Group invested in before it went public. It had obvious competitors like rival game makers, but also competed against any other way to spend time on the Internet.

7. You staff up and spend too quickly ahead of revenue. Startups need to stay lean and avoid creating excessive headcount. Founders also need to realize that they have to be their own sales force, he said. Hiring a sales staff early on is a bad idea.

“Do not fall in love with the siren on the rocks who says, ‘I can sell this,’” Mendelson said.

Young companies also should avoid expensive bells and whistles, like fancy offices and sleek office equipment.

“They can either get a full-time engineer, or they can get a bunch of desks,” he said.

8. You don’t constantly test your hypotheses. “You always have to have your head on a swivel…because in this world, everything is changing super, super quickly, and you’ve got to be on top of that,” Mendelson said. “That means reading all the trade mags, talking to a lot of people, networking like hell, asking mentors, and creating a network of knowledge.”

Getting settled in a way of thinking and taking too long to change it is a mistake even seasoned pros can make.

“I’m embarrassed to tell you how many times we’ve kept going in the wrong direction,” Mendelson said about some of the Foundry Group’s and his own ideas.

9. You mess up your public relations strategy. Mendelson believes most startups will be able to find one publication to write a story about their launch and their idea, but after that it becomes increasingly hard. A company will need to do something big to win the attention of the press.

“Be very careful about when you go out. You get one shot, and that may be it,” Mendelson said.

He recommended waiting until a product is ready for users. “If anything, wait a little bit, until you can completely delight the people who will read your press,” he said.

10. You overpromise and under-deliver, either with investors or customers. Pretty straightforward. Doing this will erode goodwill and harm your reputation, Mendelson said, and as a new entrepreneur or startup without a track record, your reputation really is all you have.

11. You lose sight of peoples’ incentives. Employees, co-founders, and investors are all human, and they’ll have different psychological and economic incentives, Mendelson said. A healthy dose of psychological savvy and skepticism about people’s motives is a good thing, especially as relationships change over time.

12. You screw up your cap table. That includes making “napkin agreements” early in your startup’s history, leaving ownership issues with departed founders unresolved, and taking in too much money from angel investors, Mendelson said. Venture capitalists do not like messy cap tables, which could lead to a company not being able to raise money.

13. You screw up protecting your intellectual property. This could mean not making sure a departed founder gives up his or her claim to the IP, or hiring an outside developer who later tries to claim credit. Mendelson recommended working with good lawyers to make sure you’re protected.

14. You don’t set defined goals. Startups need to set metrics they can hit and use to monitor progress.

15. You avoid firing people until it’s too late. Entrepreneurs need to be a little ruthless when it comes to tough personnel decisions, Mendelson said.

“I’ve never heard anyone say, ‘Damn, I fired that person too early.’ That is a statement that has never been said, ever,” Mendelson said.

16. You don’t know what you can control and what you can’t. For example, a rival company might release a new product ahead of you, Mendelson said. You can’t control the success of their product, but you can control your company’s response.

17. You don’t hold yourself accountable from day one. Set goals, work hard to hit them, and if you don’t, analyze why you didn’t.

“Make goals and hold yourself accountable, even if they become unrealistic. If they become unrealistic, most entrepreneurs forget about it. But that’s the time to change the goal, but you still have to hold yourself accountable and understand why you didn’t hit it the first time,” Mendelson said.

18. You leave the important legal stuff for later. Filling out forms and getting paperwork in order can seem like a burden when you’re excited about getting a product going, Mendelson said. But the legal work has to be taken care of.

“There are mistakes you can make in the legal world that you actually can’t go back in time and fix,” Mendelson said. “Don’t assume you can fly by the seat of your pants.”

Michael Davidson is the editor of Xconomy Boulder/Denver. He covers startups, venture capital, clean tech, energy, aerospace, telecoms, and whatever else happens above 5,280 feet. Contact him at mdavidson@xconomy.com. Follow @MichaelXBD

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  • KeepOnLearning

    Please add this into the mix!
    “You badly underestimate the time and money needed to fully develop your technology to market readiness.”

    Whether I was investing, consulting, or contracting, this is a constant error technologists make in assessing the readiness of their own darling technology or project.

    I mean no disrespect. But the most coldly logical techies can go a little soft in the head when appraising how much engineering and development are needed to make their baby sellable.

  • Jay

    I would like to know one simple fact, Is it a combination of all these points(if yes, then with what weighted percentage?) or, is it just any one these points that can lead to a startup go kaput?

  • http://www.valideval.com/ Adam Rentschler

    Re: point (3) on advisors: I don’t buy into this “… ‘a reputation constraint. Whoever you talk to should have some pain inflicted on them if they treat you poorly.’”

    Looking for sticks with which on can punish a bad actor is a waste of time. Once you’ve been screwed by an advisor / vendor / employee / co-founder retribution is a powerful instinct, but the mistake was one of character judgement on your part.

    Using reputation damage as a weapon risks a boomerang effect; no one but you understands all of the facts that support your side of the story and you should fully expect the asshole in question to distort the facts to support their side of the story.

    In short, it’s irrational to start a turd-throwing fight and expect to emerge without shit on you.

    Better to find advisors whose (positive) interests are aligned with yours and who share your passion.

  • David S. Jackson

    Great summary Michael – I think there is probably a correlation between number 4 (arrogance) and number 1 (high performing a-holes)!