John Greathouse is a General Partner at Rincon Venture Partners (infoChachkie.com). In this video he discusses 10 rookie startup mistakes to avoid.
- Expecting independent channel sales reps to perform missionary sales
- Securing your intellectual property too early
- Attempting to license an idea
- Performing a China Syndrome market analysis
- Allowing partners to write your legal agreements
- Hiring & involving a PR firm too early
- Bringing in a consultant
- Offering exclusivity
- Granting anti-dilution protection
- Engaging in premature deal adulation
I want to talk about 10 rookie startup mistakes that I've seen entrepreneurs make time and time again. And each of these independently is probably not going to hurt your visitors but if you make a multiple of these, then it might sink your business.
The first one is expecting on independent channel, an OEM channel, to sell your product before you've proven it in the marketplace. There's a lure to that. Entrepreneurs look at the OEM channel and say, “Wow, I can get all of these sales people to start selling my product for me and I won't have to spend a lot of money”. The problem with that is the OEM show channel is going to look to you to figure out how to sell the product. They're not going to figure that out themselves. So if you don't come to them with a solution on how to sell it, it's not going to get sold.
Number two, you don't secure your intellectual property too early. I know I probably have some IP lawyers out there pulling their hair off when they hear me say that, but the reality is, your idea is going to morph overtime. It's going to change you for over time. So if you run off an file provisional pattern on something too early, it may not be much benefit to you down the road when your idea finally gels. So again, be careful. I'm not saying don't, you know, be cavalier about your intellectual property but make sure you find it when you really know what you're protecting.
The third one is, don't attempt to license an idea. I teach at UCSB and I get a lot of professors that come up to me and they say, “John, I've got a great idea. What's it worth?” And I tell them 5 bucks and your idea you might be able to get a latte, 'cause it's not with anything”. Ideas are worth less. With a very rare exception of maybe you've come up with a protein or you've come up with something in the pharmaceutical industry that's a molecule. But I would argue, that's not an idea, that's actually something physical. What's worth to something is execution. So you need to go out there and execute to make your company and make your idea worth anything So don't waste time trying to license an idea.
The fourth one is don't perform the China syndrome analysis when you're doing your financial projections. Again, entrepreneurs that come to us and they say, “You know, if I only get half of 1% of this huge market, I'm going to be reach”. Well that's wonderful. Yeah, if I can get half of 1% of everyone in China to buy my product, I'd be rich too, but what's important is how are you going to do it. Talk about execution and talk about adrressable market segmentation and not pay you, well, there's a lot of people that live in China and if I could get them, that would be awesome.
The fifth one is don't allow your partners to write your legal contracts. I'm not a lawyer, all through my career, I wrote my own agreements. I would pull my lawyer in at the appropriate time and have him review them to make sure I wasn't missing something. But there's nothing magical about contracts. You could write your own agreements and if you allow your partners to do so, you’re going to be beholding to their time schedule and you’re also going to get an agreement back that’s going to be one sided. So entrepreneurs should write their own agreements, working hand in hand with their attorneys.
And also, something else an entrepreneur needs to avoid early on is getting a public relations agency involved. Again, now, I have all these public relations people pulling their hair out, but the reality is, public relations at a startup is a sales job. I got to call a journalist and convince a journalist to write about my business. Some of the PR agencies aren’t going to have the insights that I have. They’re not going to have the passion that I have. Yeah, they’ll pick up the phone, they’ll call a couple of other buddies and if nobody writes the article, they’re done. And as an entrepreneur, you’re not going to stop when two people tell you no. So don’t rely on someone else to tell your story. I often say, it’s sort of like asking someone to propose marriage for you. Like, “Hey, I’m in love with this girl. Can you go over and ask her to get married to me?” Why would you do that? If you’re passionate about that person, then you need to go over and deliver that message. You can’t have a third party deliver it.
I feel very similar about a consultant. Startups often rely on consultants and often to the payroll. If you come across someone that really believes in your business and they really want to help you, then ask them to join your company in a form of equity participation. So I’m all about consultants that are willing to actually join your company from an equity standpoint but there are far too many consultants that prey upon entrepreneurs and really suck money out of their company without delivering value. So very, very careful when somebody comes to you and says, “Hey, I love your business. Maybe I can help you.” Your reply should be, “Great, I’m glad you love my business. Let’s, you know, jump on this boat with me and let’s do it together”. And if they really do love your business, they’ll take the equity.
Something else that an entrepreneur should avoid at all cost is exclusivity. A big company will come out to you and they’ll tell you, you know, “Well take your technology into our channel. We have millions of customers. You’re set. This is a game changing relationship for you”. And that sounds great. Then they often say, “Well, in order for us to do that, we need to do it exclusively.” As soon as you sign an exclusive agreement with a big company, you’re running the risk of them putting you on shelf. Because you’ve taken away that risk that one of their competitors might partner with you, and you can’t that risk away. As soon as that risk goes away, they run off and do something else. You don’t want to get parked on a shelf.
And so, the way you work around these ideas of these concepts of exclusivity if the other party absolutely will not move off of it, ask them to sign up to a minimum commitment. So great, you know what, if I’m to sign up an exclusive deal with you, there’s an opportunity cost associated with that, I want you to cover a portion of it. I’m not asking you to cover the whole thing. I’m asking you to cover a portion in the form of minimum commitments.
Now, the way I always do this, I don’t ask them to pay me whether they make the sales or not. I just say, “If you don’t hit those minimum commitments, we’re no longer exclusive with each other. How does that sound?” 9 times out of 10, you will never go exclusive if the company is reasonable. And if they’ll really like your solution, really like your solution, really like your product, they’re going to bring it into their channel.
Number nine is stay away from anti-delusion provisions. You’ll have some heavy handed investors that will come in and demand and you might even have a senior executive early in your venture and say, “You know, I don’t want to be diluted as we grow.” Bullshit, everybody is in the same boat. If one person has an anti-delusion provision, their objectives are not aligned with yours. They’re going to want to take in more money. They’re going to want to hire more people because they don’t get impacted negatively by those actions. You want everyone negatively and positively impacted by the same actions. So don’t put a barrier between yourself and an investor an employee by giving them anti-delusions.
And lastly, number 10 is, please avoid premature deal adulation. I used to call it PDA around sales teams. And a sales person will have a really good demo and they run up and down the hall whooping and hollering thinking the deal was done. The deal is never done until the money is in the bank. And even then, sometimes it’s not done. It’s not really not done until the partner that you’ve done the deal with, whether it be a customer or a strategic partner, until they’re happy and they’re singing your praises, that’s when the deal is done. So avoid PDA at all cost.
If you’ll avoid these 10 rookie mistakes, you will be a serially successfully entrepreneur.