- Business Insider spoke to two VCs and a startup mentor who outlined some of the biggest pitfalls plaguing new companies — from excessive funding to poor management.
- “Getting the right founders is one of the toughest things in our job,” says one VC.
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Building startups can be an arduous task. Founders need funding, a great idea, good advice, and a large dose of luck to succeed — but even all the right ingredients aren’t a guarantee of success.
From Theranos to Juicero, majorly hyped startups have gone from investment darlings to case studies on MBA courses.
Business Insider spoke to two VCs and a startup mentor who outlined four pitfalls that tend to sink companies and how to avoid them.
1. Poor product
Having a market leading product is essential. Prior to launching, a company needs to both know that customers want the product, and demonstrate a strong revenue base from purchases.
“Customer acquisition is key,” Max Kelly, an SVP at startup accelerator Techstars, said in an interview with Business Insider. “You need repeatable, scalable sales to ensure strong revenue growth.”
Juicero was an excellent example of hype masking a product that ultimately wasn’t very good. The company claimed its $400 juice maker would crush sachets of pre-cut fruit and vegetables with two tons of force. It was later found that squeezing the juice packets with two hands had the same effect. The company received over $120 million in VC funding.
2. Too much money, too early
“Too much money early on can swamp businesses,” Kelly said.
Having too much funding can lead to a culture of execs which damages a startup’s ability to make rational spending decisions and prioritize things. Failed startup fund Rothenberg Ventures is a good example of a company which failed to get its priorities in order, having spent $200,000 of investors money on a box at the Super Bowl.
Rothenberg Ventures did not respond to requests for comment.
Avoiding these kinds of issues is all about governance, according to Reshma Sohoni, cofounder of London-based VC and accelerator Seedcamp. “It’s a fallacy of startups that governance makes you slow, but having these structures in place is what ultimately builds the right mindset for subsequent growth,” she said in an interview with Business Insider.
And sometimes the risk of failure isn’t a VC deterrent, especially for bigger funds.
“Some funds can afford a cockup because they have so much capital to deploy,” said Rob Moffat, a partner at Balderton Capital in London, who used to work at Google and Bain.
3. Failing to hire the right people
Unsurprisingly, getting the right people in to help scale and grow your business is one of the main reasons startups are successful.
“It’s team, team, team for us,” Kelly said. “Hiring the right team is essential and getting the best people in is massively important to a company’s infrastructure.”
VC’s noted that hiring top talent was key to getting over growth hurdles. This can be tricky for some founders who are unwilling to hire staff who are more qualified than them or fail to pick people suited to hard-working cultures.
On top of that, erratic management from founders and management can have a real impact on the culture of a startup. At Zenefits, an insurance market disruptor, the company’s larger than life founder Parker Conrad was found to have stopped at nothing to scale rapidly while the business was also increasingly famous for wild, out-of-control parties.
Conrad even created an internet extension which allowed employees to bypass a 52-hour online course required by the state of California to sell insurance there, according to Bloomberg.
When contacted by Business Insider, Zenefits CEO Jay Fulcher said: “The company grew too quickly, in an unchecked way, and spent too wildly. But, we haven’t lost our way or our potential.”
“There’s a winner-take-all mentality in more and more markets,” said Sohoni. “This growth pressure can be a powerful driver to cut corners. Founders with good or bad behaviour, therefore, have outsize impact, because their attitudes and behaviours permeate right across their businesses.”
4. Misguided belief from founders
The pages of startup history are littered with founders who extol the virtues of incredible self belief and a determination to succeed. Unfortunately, these same individuals can be the designers of their own downfall as they stop at nothing to win at all costs.
Famously, Elizabeth Holmes of Theranos took in billions in investor money for a blood testing product which ultimately didn’t work.
“There’s a fine line in entrepreneurship between having massive belief in your business and abilities but you can stray very quickly away from that,” said Moffat. “Getting the right founders is one of the toughest things in our job.”
You can read more about Theranos in this Business Insider story by Lydia Ramsey. Holmes’ lawyers did not respond to a request for comment.
5. Failing to know your rivals
Competitors in the same industry can kill growing startups in their tracks.
In the US, wearable fitness Jawbone was blown out of the water by similar products from Apple and Fitbit, which were seen as a better device at a lower pricepoint.
Similarly, UK ride hailer Hailo was swamped by companies such as Uber. Hailo raised $100 million to push into the US market, despite the fact that competitor Uber had raised $1.5 billion by the same stage.
“Hailo didn’t know enough about its enemy’s ability to raise funds much faster, and the sheer quantity of funds needed to build scale across the big US cities,” Moffat wrote in a blog post.
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