Throughout my investment banking career, I’ve come across a number of brilliant entrepreneurs and exciting young companies. And yet, many outsiders only see the romanticized version of entrepreneurship. They think it’s easy, and that once the company has launched, the founders can sit back and relax.
This couldn’t be further from reality. The truth is that entrepreneurship requires hard work, sacrifice, resourcefulness, and tenacity. Below are five key lessons that every startup founder should know.
1. Accept that You Can’t Do It All Yourself
You may have conceived the company and gotten it off the ground. As a startup founder, however, you’ll quickly find that you are spread very thin. Maybe too thin.
Don’t be afraid to hire help.
I’ve seen founders bite off more than they can chew—it happens all the time. Recently, I was advising a next-gen health & wellness startup in New York. Founded by two celebrity trainers, the company created an online platform for fitness memberships and collaboration, and garnered national-level interest from top professionals, publications, and executives.
Even though the company appeared to be thriving, the founders started to fall behind in many areas of the business.
They needed help with corporate introductions so they could start tackling corporate wellness programs, but lacked the bandwidth to chase the large companies that could really make a difference. While doing much of the initial promotional work themselves, they realized they needed to connect with a boutique marketing agency that truly understood their vision.
Basically, they determined a cookie-cutter approach simply wasn’t sustainable. The founders needed help, so they hired experts to oversee certain elements of the company. This proved a solid investment, as it allowed them to focus on their core business.
I’ll say it again: Founders shouldn’t hesitate to hire help.
Another startup I advised was founded by a group of technologists and product people who previously worked behind the scenes at other companies. When the founders launched their own venture, they were pleased they had developed products that outperformed the incumbent offerings in their sector.
But this wasn’t enough.
The company had its foot in the door with many blue-chip customers through proof-of-concept arrangements. However, they struggled to generate more sustainable, broad-based interest. They needed to hire an experienced head of sales, business development reps, and other senior managers who could articulate the company’s value proposition to potential partners, customers, and investors.
Unlike many companies that struggle with their product offerings, this company had a great product—but to build momentum, they needed help with the rest of the business.
2. Beware of Disputes at Critical Junctures
While the founders may have launched the company with a shared vision, perspectives change over time—and this can lead to disputes. Years ago, I was helping a top eCommerce company through a capital raise, and it still bore the scars of dysfunction from two founders with divergent visions.
They started the company as a men’s eCommerce site, yet continuously bumped heads on private labels versus new brands to feature, native advertising partnerships, and brand partners. Eventually, the disagreement began to permeate the company’s strategic direction, and one founder had to step aside.
This may be an extreme case, but it reinforces how important it is for the company’s key decision-makers to be in sync.
And disputes aren’t always internal—they may also come from your investors. Some investors have a very rigid view of ROI, and hesitate to put funds into a young company (follow-on rounds). Some are unreasonable about recapitalizations and secondary raises, and unwilling to accept dilution in subsequent investment rounds.
At the abovementioned men’s eTailer, the company was at a critical juncture in its lifecycle, and needed either a significant capital infusion or to be sold outright. One of the initial investors on the company’s cap table had challenging sale terms, and yet they were not willing to invest further capital into the business. This presented a catch-22 for the company.
In all cases, the founders of young companies must be weary of competing interests and increasing stakes, which can lead to disputes among key constituents. In many cases, the disputes are exacerbated at critical inflexion points like cap raises or sale processes.
3. Take Care of Your Constituents and Be Mindful of Cap Table Concerns
You will likely ask a great deal of your employees in the early days of the company, so reward them accordingly. Consider developing an employee stock ownership plan (ESOP) that will be subject to dilution and need to be topped up over time. Employees should have a vested interest in the long-term success of the company, and be incentivized without draining the startup of its near-term cash.
A business development executive colleague of mine drove a software startup to acquisition by pouring his heart and soul into the company. After graduating from a master’s program as a subject matter expert, he initially joined the startup as a software engineer. Within a few months, his role expanded to include business development and other responsibilities—and the company’s founder wasn’t able to offer commensurate base salary increases.
However, the founder boosted my colleague’s equity compensation by making him a meaningful owner of the startup. This gave him an extra jump in his stride, and helped him bring the company to the next level while aligning everyone’s collective interests.
Good investors are generous, and not only financially. They are also generous in the way they offer guidance and support. In fact, there are many cases where acquired companies still consult with their initial investors. For instance, the corporate development team at Jet.com was reported to consult with their initial investors at Forerunner Ventures even after the company was sold to Walmart.
The key takeaway here is that barring follow-on investment, early investors are subject to dilution and need to be properly incentivized.
To this end, it’s important to be mindful of dilution to your early investors and employees. New investment dollars are not free, and will likely come at the cost of dilution to the current residents of your cap table. The extent of dilution can be exacerbated by the specific parameters of a term sheet (such as required ownership percentage, liquidation preference, post-money valuation, and other factors).
As a young company grows, it will garner an increasing number of constituents and an increasingly complicated cap table. Investor money is not free, and not all investors are of equal benefit over time. That said, founders should not overlook their company’s most important assets: its employees and investors.
4. Be Adaptable and Pivot if Needed
A colleague of mine runs a successful digital media company. When I helped him grow the business a few years ago, he was adamant that the company remain both a content and an eCommerce business. His thesis was that by having both content and eCommerce on the same platform, the company could sustain a virtuous, self-perpetuating cycle.
While my colleague devoted immeasurable time, money, and resources to build this unified platform, growth never materialized. Either the media segment was growing, or the eCommerce segment was growing—but only ever one or the other. And when we went out to raise money, investors either didn’t get the concept, or they didn’t agree with it.
Eventually, the founder admitted his thesis was wrong and separated the two segments. He set out to spin off the eCommerce business, but then saw both segments receive substantial inflows of capital. This spurred growth, and today my colleague runs two separate, rapidly-growing companies. His realization and ability to pivot proved transformative.
A connected car company I advised went through a similar experience. As a startup, the company focused on providing a white-label hardware device that allowed internet connectivity within the car. This was useful for both consumers (drivers) and the connected car service providers (app makers, car companies, and insurance services). While the company used a hardware offering to find its place in the connected car ecosystem, it wasn’t until it released a software platform that it became a sought-after industry staple.
The company discovered organizations in the tech, telecom, and other sectors had a much greater need for the data and versatility of the software platform, and realized that remaining a nascent hardware vendor simply wasn’t a viable answer. Adaptability was crucial to their long-term sustainability.
5. Remember that Tenacity and Resilience Are Key
Most early-stage startups don’t work out. As an investment banker and startup advisor, I’ve come across many companies that are struggling or worse. The early days of startups are often stressful and intense.
Do not let this deter you.
There’s no reason why your company can’t make it. Industry behemoths like Amazon and Uber both faced significant hurdles in the early stages of their existence. Amazon built a money-losing logistics and warehousing network, while Uber was greeted in San Francisco with a cease-and-desist order. Marc Benioff revealed he was turned down by every VC in Silicon Valley when he first launched Salesforce. Nonetheless, these companies didn’t quit at the first, second, or even the 20th sign of trouble.
Last year, I was helping a founder sell his struggling company. The company had been plagued by growth and execution issues, and a particular investor had become its lifeline. After months of diligence, the investor backed out and things seemed bleaker than ever at the company. That said, the founder didn’t quit—he instead used his resourcefulness to keep plugging away at the investor community.
He ended up selling part of the business, while receiving a capital infusion into the remaining company.
Silicon Valley is full of success stories—success stories involving founders who were turned down by hundreds of investors, and who faced countless business and growth issues. It is not intelligence, technology, or ample funding that ensured these companies’ success—rather, it was the founders’ tenacity and persistence in the face of adversity.