8 things I wish I had been told before doing my start-up

I have been involved in enough start-ups now (over 10 and counting), and you think I would have learnt by now? But as each week goes by, I learn something new about business, people, VC’s and just plain old “how to succeed”.

So I started thinking about some of the most valuable lessons I have learnt in the last 15 years of working in technology start-ups. And although this list is in now means exhaustive, these are probably the things that I have found out on my own, have not read anywhere else (well, at least not the way I look at it) and are by the most important for me.

Before anyone starts telling me I am wrong, I’m not!! This is purely my opinion, and these are definitely things that I think are important, and I hope the rest of you get some value out of this. I would love to hear other things that people have learnt by going through a start-up.

1. Invest in People
This is one of the underestimated and undervalued parts of any business. Don’t be so egocentric to think you can do everything, because you just can’t. The hardest thing you will ever do is try and figure out your own shortcomings. If you are no good at sales, then get someone who is. If you are inexperienced at management or raising capital, then find someone who is. Now, I don’t mean that you start getting a cast of thousands involved, you might have a good buddy who is good at the stuff you are not. Or God forbid, your wife! Good people don’t come cheap, but get creative, you may be able to cut them in, or provide some Share Options when you do make it big. But don’t skimp out – if they are valuable and spend a bit of time on your project, they need to feed their families too. And if you are going to be going down the VC road, you will definitely need the people, but more on that below.

2. 100% of Nothing, is Nothing!!!
I have seen too many start-ups get caught up in their own BS. They get really protective about the idea, they think that it is going to revolutionise the world and don’t want to give up any of the “action”. If this is you, then you are on the path to failure. You hear a lot about the guys that start their businesses in the garage on their own and made it big, because it is a romantic story to tell. But spend 5 minutes talking to people on the business side, and you soon find out there is a lot more back room deals, and details in the structures than you are led onto believing. So just accept it and be smart about it. Don’t start slicing and dicing like vegetable chopper. But be calculated and well timed. The percentages are just abstract notions of nothing at the moment. 100% of nothing is nothing, and if you only end up with 10% in the end, how about you do a YouTube deal? Hmmmmmm, I wouldn’t say no to that. Remember, your a small fish in a big pond right now, lots of sharks, so play the game.

3. Have a model, not a plan
Ok, this is a bit of a ‘bum steer’. You do need a plan, but a fully documented business plan that is 100 pages long is so, um dotcom. Nobody reads those things, and at this stage, your business is changing by the day, if not the hour. The reason you have a business plan is to show that you have thought through all the issues. Good sessions in front of the whiteboard, and scribbling in paper gets the same result. You may want to have a 2 pager, but I generally find that whenever someone asks for one, I will rewrite from scratch anyway. But I can’t stress enough how important a model is. A model is just your spreadsheet plan of how you are going to make money. Not only is it good for any potential investors, but it is good for you. Because in your grand plan, you may have not worked out how to make money out of this idea yet. Well, if you don’t figure this out, who do you think is going to do it for you? The investors? Keep dreaming cowboy! Firstly, I speak to a lot of Angel Investors, Private Equity and VC’s and they are constantly frustrated by how many people come to  them this way, and its a waste of time. If the VC does see the money potential, do you think they are going to disclose it to you? Of course not! They have to think of their investors. So they will try and get into the deal for as little as possible, and then they will make money from it. The model is also going to be good for you. After putting it together, you might see that you are not going to be cashflow positive for 24 months, can you last that long? How will you last that long? Or you might see that to realise a profitable business, you need 10 Million registered users, is that realistic? Believe me, you will live and die by your model – work on it often and don’t be scared to change it!

4. Cashflow is your enemy
Once you have your model, you will hopefully have a plan you can follow and start to see where the revenue is coming in. But as this starts to happen, you are going to struggle with cashflow management. I mean in your day to day. Sometimes it can take 60-90 days to get cash in, and creditors are expecting payment from you today! Don’t underestimate this issue. You have probably heard that over 50% of small businesses go under in their first year. And here is your reason (this is fact!). Keep a close eye on this, as it can be your downfall. Your start-up may just start with you working part-time and unpaid, which is fine, but as things grow, then so do your costs. Make sure you try to plan for this in your model too! Don’t forget all the little things like paying people, an office space (eventually, may be from your living room for the moment) and other facilities.

5. Run it as a Business – Strictly!
When I started my first business, I treated it as an extension of me. Meaning, I pulled money out of my wallet to pay for things, and then pulled money out of the business to pay my rent. There was no delineation between me as a person and me as a business. Although this is doable and is just an “account entry” exercise, if you have grand visions, this is a mess you don’t want to explain later on. If investors get involved, they want a nice clean business. If you start claiming the business owes you $50k, and you are claiming that with a shoebox of receipts, the investor is going to wonder who else is coming to “claim” their expenses. Also, the investor wants to be confident that their money is coming in to invest in the growth of the business, not pay past debts. That is a big red flag. I’m sorry to say, but don’t expect to put $10k or $50k into your business thinking you can pull that out when an investor comes on board. That is your investment. That investment, plus your “sweat equity” is the reason that you are going to retain a percent of ownership. It shows your commitment into the business. If you run the thing as a business from the start, it will demonstrate that you have thought this through and executed a tight business. Try to invest in batches, ie/ put $5k in, even if you don’t need it in the business. Use that to pay yourself a salary if you have to. Whatever you need to, but treat the business as if it was not yours, and assume that there is going to be someone auditing your books at some stage, so make sure that it is neat.

6. The truth about VC’s
Firstly, VC’s are a good thing! Not that you will like what they do, or how you will need to deal with them, but the reality is that VC’s are not angels from heaven, they are running an investment business and dealing with people’s money, and that is what you need to keep in mind. Although I could probably write a separate list about VCs themselves, I think that there are 3 really important points that most people don’t realise about VC’s.

One, be very clear as to why you need the money from a VC. If you are looking to pay off dad, and Aunt Margie for their money that helped you get started, then you are dreaming. VC’s are not there to pay off your debts, they are there to provide money to build the business and make a huge return on their investment (usually in the 10x range at least).   So make sure you are very clear about how their money is going to make this idea huge and how (and when) they will get their return.

Two, the VC is not investing in the idea, they are investing in the People, namely YOU!! Sure, the idea can’t be crap, but if the idea is good and you don’t have a group of people to execute a plan to deliver a real business from it, then you are going to have a hard time. And when I mean people, I mean a management team. Things like a CEO, CTO, marketing & sales etc. It is unlikely you will  get to have your own CFO, the VC will usually put one of their own in. Don’t think they are going to throw a gazillion dollars at you and then not have any more input on how it is spent.

And three, this is a real variable and negotiation point, but many people often think about how much of the business do they want to give up for VC money? And this is really going to vary at what stage you are at in making money, and how desperate you are for a VC. But keep this in mind; a Consultant or Partner with a VC is responsible for managing a portfolio of money and companies. They need to report back to their investors on how the money has been spent. So don’t for one second think that a VC is going to be happy to go back to the investors to say “This month we put, $10 million into company XYZ for a 10% stake. No, we don’t have control, but we feel real good about this one!!”. As much as you don’t like it, VC’s are going to take control, not always from how many shares they hold in your company, but also by how many board seats they have.
Now, I am not saying that the above are the rules, nor the norm. But they are more likely than the romanticised scenarios you here of like Facebook investments. So, I think that if you are armed with this knowledge, you will be able to play the VC game a lot better, and hopefully have a little more control over your destiny.

7. Timing is Everything
Timing is often not in your control. What if some new technology released suddenly devalues your idea? Not much you can do there, but shutdown or adapt and evolve. But some timing you can control. Timing of when you go and seek capital; too early and you won’t get it, too late and you won’t need it. Timing for getting the right people; need to start selling, make sure you plan ahead, you don’t want to have a product ready for sale today, but it will take another 3 months before you can get the people or the channel to sell it. Plan ahead, not in a business plan sense, just scribble out timelines, change them daily if you have to. The important part is not the plan, its the planning!

8. Did I mention Timing is everything?
Ok, I am not going on about the same thing again. This is more of the 64,000 foot view of your timing. And it is not only timing, it is the need to step out of your business from time to time, to take a subjective view. Have you been working on this thing for 5 years, but you expected activity in 2? Why is this the case? Is the idea and therefore the business still viable? Do this in a subjective way, meaning that you try and do it in a way that you are talking yourself out of the business. If by the end of this you are still in, Great! What is the relevance of this and timing? Everything! Because the timing of this process is important. You will naturally do this when a big deal that you have been working for 12 months suddenly fails. But this is the wrong time to do it. You need to do it at the height of the deal making process. You need to take the approach where at the height of the sure-thing deal you start to consider what if it doesn’t happen? Is the business viable? Am I doing the right thing? Am I wasting my time and money? Although this may sound pessimistic, it will just strengthen your position. Meaning that you may be able to think of a way to make the deal even more attractive, or have a recovery plan in place if it doesn’t happen, ready to go – just in case.

Well there you have it, my top 8. There are many more, but these are the ones I found most important and  least talked about. Have you got any others?

1. 

   E says:

   September 29, 2008 at 4:36 am

   Nice article. So true. Thank you. Good to know people has gone thru what I’m going thru these days.
2. 

   Entrepreneur says:

   March 8, 2009 at 12:26 pm

   Awesome list. I feel you on everything. The #1 thing i wish I had been told before doing my start-up is, “Here’s a couple million dollars for your start-up.”