Diving deep into the startup world from a day job is the dream of many entrepreneurs. Taking the plunge is thrilling despite (or even because of) that risk involved. Every founder is bound to make mistakes with their first startup and learn from them, but there are some common pitfalls that you can avoid if you put a little more time into your resource planning and business plan. Below are some of the most common mistakes to avoid surrounding launch day. If you can try to resolve or eliminate them before they become a problem, your business will be better for it.
1. You're focusing too much on raising capital rather than improving your product or operations.
It's totally understandable that a new business owner is concerned about lacking capital. It's often why businesses fail, among other reasons like lacking proper guidance. In fact, one-third of small businesses start with less than $5,000, often coming from personal savings. The startup realm is wildly different because of the focus on rapid growth and team-building which often predicates much larger rounds of capital.
Whether you're a small business owner looking to open a brick-and-mortar shop in your community or a startup founder aiming to make the next big app, you're both likely to make the same first-time entrepreneur mistake:
Focusing too much on chasing ever-larger rounds of funding instead of both financial and non-financial aspects of your operations like product pricing and quality, how you compare to the competition, and getting to know your current and prospective customers.
Fixing these issues will lead to better traction, which is more favorable for seeking funding in the future.
2. Marketing gets neglected in favor of product development.
There is a delicate push-pull dynamic if your startup is running on a shoestring budget. You need to invest in your product, but it can come at the cost of other crucial aspects like marketing and community management.
Marketing isn't just buying ads. How are you making people aware of your product? How many people do you have doing outreach for you full-time versus hiring a marketing agency for the tasks that your in-house talent can't handle? It can be tempting to avoid marketing expenses, but don't fall in the trap of assuming you're just advertising an unfinished product. Dedicated marketing people help develop your customer base and contacts so you can focus on building the perfect team and product.
3. You're giving away too much equity up front.
It's what we call the founder's dilemma: how do you grow your business at the pace you want without giving away too much and having it not really be yours anymore? In the beginning, you'll want to attract talent with the promise of owning a piece of the company, so they'll be just as invested in the startup's long-term success as you are. Investors will also require a significant chunk of your company or else they won't come on board. But no matter how big your company eventually becomes, you don't want to be left holding an empty bag because you gave out stock like Halloween candy.
4. You're hiring at the wrong time.
Depending on how much capital you have to work with, this is ultimately what determines how soon you can hire people. But whether you're hiring freelancers or employees, do you actually have a clear idea of what you need them to do?
Don't make a new hire do three different jobs because you have too much work for yourself but not enough capital or cash flow yet to steadily pay multiple employees, but also don't hire just to have someone on board when you don't have enough for them to do yet. Hiring too early significantly increases your burn rate when you don't need talent yet — but hiring too late can cause stopgaps in growth because you're losing momentum and can take a while to get back on track.
5. Not striking the right balance between what business consultants tell you and staying true to your vision.
You can certainly learn a lot and gain many valuable insights from what investors, consultants, and business coaches tell you or else you wouldn't be buying their books, paying for their time, or attending their events at conferences. But how much of their words will you take to heart?
It's one thing to have a fellow entrepreneur tell you "brass tacks" kind of information like to form a C corporation instead of a S corporation, but another to completely stray from your vision and mission just because of what a coach told you or wrote in a book. Be willing to listen and learn, but don't completely stray from your vision. What worked for one founder won't necessarily work for you.
6. Your company has insufficient financial controls for fraud and theft.
A first-time entrepreneur may have a hard time determining how to establish financial controls, especially when the company is still small and not public. Employees and co-founders alike can get disgruntled if operations aren't going the way they thought they would, making your operation susceptible to theft and even embezzlement. Have an external accountant familiar with your industry and stage of business (small business, startup, mid-size company, etc.) thoroughly review your financial infrastructure and personnel so they can guide you with the right procedures and policies to 1) prevent theft and 2) bolster confidence from capital sources like banks and investors.
Your first startup will always be a learning experience, but these mistakes happen often enough that they can be avoided with careful planning.
Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
