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Top Mistakes Founders Make (And How to Avoid Them) 🙌 #AskTikhon

Summarized by Jill Ozovek 

Any of this sound juuust like the kind of things you’re doing to raise money for your startup (or get it off the ground in general)? 🚀

  • A diet consisting of the usual staples of gummy bears and Pepsi?

  • Sleeping on the floor of the office because going home is too far?

  • Squatting at your friend’s parents’ house for a few years after college?

  • Selling President Obama-themed cereal in DC to keep you and your fellow co-founders afloat and fed?

***You are ddreamy***

In a packed house at Exhibit C in New York City last week, serial founder (with exits) and investor (of many female-founded companies) Tikhon Bernstam talked with the Dreamers // Doers community and founder Gesche Haas about the biggest mistakes early founders make and how to avoid them when it comes to fundraising, incubators, execution, hiring, advisors, balance and lots more.

***You're a rockstar***   unspecified ***You're a rockstar***

Things weren't always as rosy for Tikhon. He failed e-l-e-v-e-n times (*built* 11 different products, painfully) before finally making it. You can be certain, he made many mistakes along the way. Read on, so you can learn from his mistakes, and invaluable knowledge gained over the years. You'll soon be able to tell why he is viewed as one of the hands-down most helpful investors/advisors around. 

***You are dreamy***

FUNDRAISING:

Gesche: When should someone raise money? Who are the kinds of people who raise money but probably shouldn’t? What are the top mistakes?

Tikhon: “One thing that tripped us up at Scribd was trying and failing to raise before we had strong product/market fit or a great market. Before it was spreading by word of mouth. Before we had identified a segment of users who absolutely adored the product and who would be mortified if we shut it down."

"My friends who take money before getting strong product/market fit often find themselves in a bind, where the investors don’t want to hear about founders flailing around with giant pivots or new markets looking for the basics they thought you already had nailed, all the while burning their money to get there. Weak product/market fit can be more stressful than the work solving all the problems around growth once you hit a nerve."

You don’t get burned working too hard on something great; you burn out working on something that isn’t… Click To Tweet

The lesson here: Don’t raise too much money before you have product-market fit in a great market.

For example, a friend of Tikhon’s with VC money for a product in the gift market probably should have made a pivot, but because he had money from a VC, it was easier to focus on distribution and growth numbers than make the hard call to change products or markets entirely. He regrets raising VC money before having a product that users absolutely loved.

"His friends thought Scribd was an overnight success, not a year of twelve stressful pivots and finally a hit, he recounts. But had they raised too much money early on, for one of the twelve failures, it’s unlikely he would have found something that really struck a nerve."

Tikhon then described the so-called Broken Windows strategy that many scrappy and resourceful startups utilize. This can involve sales before writing a single line of code.

Optimizely had paying customers signed up before they had a product. After wasting too much time building products no one wanted, they were determined to find paying customers before going down another code and product rabbit hole. And now they have a wildly successful company.  

Other things you can try: 

  • Landing pages that accept credit cards; but never charge anyone, just see if anyone in your target audience is even willing to pay in the first place. Asking for an email address is not enough.

  • An email address on a landing page is not a customer.

  • And you can always have a 500 error pop up if they try to pay, and apologize you haven’t built that part yet, but hey here’s half off for life for the inconvenience since you’re such a great customer.

  • Note: this is particularly helpful for evaluating B2B SaaS ideas with just a landing page.

Before Parse, we launched a dozen landing pages for various ideas, and we talked to almost every user who signed up and especially anyone who tried to pay us for the product. Why?

"We didn’t have much time to find something that was going to work. We needed to know if we had struck a nerve with our target customers in our market. Everyone has lots of ideas, but too many people immediately dive in and spend a year working on one without validating it first, only to find the idea wasn’t as great as it seemed."

"Usually the more product you build before getting users/customers, the harder it’ll be to change things up when you need to. Don’t let yourself get mired in the quicksand of sunk cost fallacies. The harder you fight a bad market or no product/market fit, the deeper you’re mired in it."

Why raise money at all?

"Raise capital when it can accelerate growth so much that the entire company is worth much more than the effective dilution that capital represents. If giving away 20% of your company for $1M makes the company clearly worth 50% more in the medium-term, because you are starved for resources to grow faster, you should do that all day."

"Finally, consider not raising at all. Atlassian never did. They’re public today. They bootstrapped. (Later they took a little VC money only to cash out employees who needed liquidity, but I don’t think it went into the company coffers.) Still, note it took them 14 years to go public. Maybe capital would have helped them get there faster. But the fundraising climate in Australia wasn’t nearly as great as the one you’re either blessed or cursed with here in the States."


 

Gesche: How big should people go for seed rounds? It’s really kind of like dating - you’re not supposed to say you’re raising until you’ve got interest, so how do you do it?

Tikhon: “You should raise as if you have one shot at the seed round. Most investors will be concerned if you can’t get to an A from your seed. They’ll wonder what’s wrong, and why a second seed will solve that problem.

"Don’t waste time chasing investors. Instead create an investment opportunity so alluring they’re chasing you around."

"Fundraising is a lot more fun when you’ve got strong product/market fit, passionate users who are spreading your product by word of mouth, and you have sustainable distribution figured out. Growth will almost necessarily follow, after you get those things right. Capital is best applied when used to fuel sustainable or profitable growth." 

"Remember that most investors have simple incentives. They want to hit unicorns. The 100x or 1000x deals. The game is sadly tilted or even rigged against those happily pocketing consistent low-risk 3x returns from seed stage investing.”

He went on to say you should always use YC SAFEs (similar to convertible notes) in a seed round if you can, and he prefers avoiding priced seed rounds. He also prefers raising seed money from angels and early-stage funds rather than from VCs, whenever possible. You’ll be better off for it.

Also use rolling caps on the SAFEs and so-called “high resolution financing.”

"Many investors are herd-like creatures - they want to know who else and how much is in the round before they actually commit. So every time you get new money, consider raising the cap a bit. Investors are irrational about getting hit by a higher cap, and it will force those on the sidelines to decide one way or the other, quickly. Not to waste your time, dithering, not saying “no” just in case the deal takes off, and they can jump on board at the last minute."


 

***You are dreamy***

INVESTING FOR GROWTH:

The conversation then turned to growth and how investors factor that in:

As Tikhon put it, “So many people invest in growth alone and that’s not right - a lot of the recent high-profile flame-outs that raised tens of millions of dollars were unsustainable, unprofitable growth disasters that had no concrete, proven plan to miraculously become profitable at scale."

"Like Bernie Madoff, they took in more and more money to cover up the fact that earlier growth was unsustainable and fundamentally unprofitable at most any scale. So many companies take years to find true product/market fit. The Airbnb guys sold cereal to stay alive. Obama Os and Captain McCain’s in DC. They made $40k off that one adventure alone!"

"Why did they have to do that? No one would invest until their ostensibly crazy idea had passionate users and a thriving marketplace in NYC with distribution figured out. Ultimately, the best investors couldn’t ignore the combination of a huge potential market and strong product/market fit with distribution figured out. The resulting growth from getting those things right was the icing on the cake."

"Even after the Y-Combinator (YC) accelerator program, most of the top YC companies to date needed at least a year to get to the point they could raise a Series A from a VC firm. Weebly never even got an A. Sequoia invested the first VC money years later in what was called a growth round. Give credit to the Weebly founders for sticking things out so long without the instant gratification of easy capital that so many flaky founders seek."

Growth alone isn’t sufficient to build a great company, evidenced by the demise of some high-profile… Click To Tweet

"Growth is the result, but not the cause. Determined founders stick around until the growth comes. (Bonus points and higher valuations await those who additionally prove effective and sustainable distribution channels before raising)."

"Determined founders never hurt. Who else would struggle on for so long on so little to get all those foundations right before the growth really kicks in."

Focus on growth as your one key metric at your own peril. Click To Tweet

**You are incredible*** unspecified

**You are incredible***


INCUBATORS/ACCELERATORS:

Gesche: What particular incubators/accelerators do you like? What are the top mistakes of people trying to get in who don’t ultimately get in?

Tikhon: “These days, it’s harder to get admitted into Y Combinator than Harvard, going by the published percentages, anyway."

"In terms of the accelerators on the radar, YC is widely considered the Harvard of the space. And they’re outstanding, especially for consumer B2C products."

"But let’s mention some others: I’ve heard Alchemist is a great accelerator for B2B startups. Lemnos Labs is absolutely amazing for hardware companies. I’ve heard good things about Rock Health for healthcare. 500 Startups and TechStars and AngelPad all have great mentors and companies."

"Founders make companies great, not accelerators. Accelerators are good for “accelerating” growth when you’ve already figured out the foundations. Exactly like the studies that show the kids who turn down Harvard to go to a state school are just as successful later in life, the best founders will succeed regardless of what any accelerator says. Still, a Harvard degree can make getting that first job easier, just like an accelerator can make the whole startup slog easier too."

"Regardless, like Harvard, the admissions process is imperfect. Neither Harvard nor accelerators get all the decisions right. For accelerators, they just try to minimize the number of really strong misses. Losing the next Airbnb to your competitor is how an accelerator gets hurt. They don’t get all the decisions right. Far from it. Their approval is not the goal. Building a great, successful company is. If you optimize purely to get into an accelerator, you’re less likely to do that."

"I think too many accelerators focus on growth as the one and only gospel, to their own detriment. I understand why -- all great companies eventually had growth, so they hope they don’t miss one by not admitting a company that appears to be growing very quickly. But they therefore admit a lot of companies with unsustainable fake or short-term growth, and subsequently can miss the companies that take the time to get all the pieces in place to have the foundations set for a great business. A lot of the very best companies will demonstrate the holy grail of growth later, once it’s already too late and the accelerator has missed them."

"That said, if you can show good-looking growth numbers, you can likely get into many accelerators. Without the fundamentals figured out though, you will flame out before you can fix your foundations. Before you run out of fuel for your unprofitable fire. Because throwing more and more fuel on the fire becomes top of mind."

"In terms of applying, you really want a product with passionate users or customers in a great market, and indications you are strong, determined founders. You’ll be better off if you can show growth, because admissions committees do hope for that, while praying the underlying foundations are in place to sustain it."

"Many accelerators shun solo founders, unjustly so. Having a co-founder will help your odds of getting in, because the bad ones will say “how can the startup be any good if the founder couldn’t get anyone to work with them on it?"

"A really strong reputation or track record, or references from people they trust, can often work, when admissions will gamble you’re good enough to figure out the rest. Alternatively, working for a few years at a portfolio company of theirs is very helpful to getting admitted."

"Counterintuitively, It’s often better to show no revenue than a little bit that isn’t growing. If they see 10k a month revenue that is flat, it’s harder to let their imaginations run wild where this rocket really goes."

"While accelerators may sound expensive in terms of dilution, they are typically not. If they want 7% for not a lot of money, that’s not necessarily a bad deal for you. Optimize for ownership over success and achieve neither. Consider instead: “does this program make my company 7% more valuable in the medium-run or before my next financing?” Usually, it does."

"In other words, the dilution from an accelerator can pay for itself ten times over. Startup outcomes are so binary, and the odds of great success so low, that if you’re going to take on outside capital, optimize at all times for your chances of success, not for what percentage you own. Make the pie so big you never have to ask how thick your slice is."

"Other perks of an accelerator: You get a ton of discount codes for services like AWS you probably pay for. Potentially 6 or 7 figures worth of free services in all."

"And let’s not forget, demo day style events in front of great investors. Those can be amazing for fundraising at higher valuations than you’d likely see on your own. Being admitted to the accelerator alone is usually a strong signal you’re more likely to succeed, as you’ve been pre-screened, and investors pay more for access to those vetted companies."

"Remember, the greatest value you derive from most incubators is the people and network and community they give you access to. And often to many of your first users or customers, your fellow accelerator portfolio startups and batch-mates."

"Advice is cheap. Most incubators publish all their best advice online anyway to get more folks to apply. Their own form of thought leadership to get distribution for their product, getting the best startups into their program. But you can’t buy all the other good things about the good ones."

**You are incredible***


TO PIVOT OR NOT TO PIVOT: THAT IS THE QUESTION:

Not giving up but knowing when to pivot is a whole separate topic. Tikhon did emphasize: "If you don’t have founder/market fit - that is, i.e. you don’t “get it”, you aren’t in the 99th percentile of those who understand *your* market and the existing products and holes it has, you will likely fail."

As Peter Thiel talks about it...you need a “secret.” Founder/market fit helps you get one.

In terms of determining whether you should be digging in or changing ideas, Tikhon suggests: "You want to find a few users in a great market who are so passionate about your product they become your strongest evangelists. You’ll know it when you have it. For example, they’ll be spreading your product by word of mouth for you. You won’t have to pay to club every customer over the head with your marketing message. Some users will be coming to you by word of mouth, for example. Keep iterating till you get there!"

**You are incredible***


HIRING:

  • “Be generous with employees. Be generous with equity and titles. Optimize for success not your own ownership percentage if you’re raising outside capital. Make people feel well-treated, and they’ll pay it back for you 10 times over.”

  • “Stand out from the pack. Treat employees dramatically better than the next startup. You’ll find hiring is so much easier. Be generous with options. If they’re ever worth anything one day, you’ll have a fortune anyway.

  • "If a candidate doesn’t make your company three percent more valuable in four years then you shouldn’t have hired them anyway. If they do, give them the three percent (or more). You still typically get (unfairly in my opinion) a year to figure that out before they even vest anything."

  • "Consider being bold and having a one month cliff. You’ll know in the first week if the hire is a good fit anyway."

**You are incredible***

unspecified-1 *You're amazing*

MISC ADVICE & LEARNING FROM MISTAKES:

  • “As Bezos has talked about, instead of focusing on jumping onto a trend, consider focusing on the things that never change. People will always want things faster or cheaper so the best businesses like Amazon are often built upon what people will always want, not what’s trendy right now.”

  • “Trying to fundraise for a year with no growth or product/market fit was a complete and utter waste of our time. We had nothing to show for it.“

  • “Many top YC companies took over a year to get to the point of being able to raise VC money. Don’t be too beaten down if the investors don’t love it out the gate. You kind of need to be dismissed as a toy or a stupid idea sometimes; if they’re loving it too early you’re often in dire straits.”

  • “Avoid giving away advisor shares. You want that later in the life of the company when you need advisors; in the early going, most advisors can’t help you find those passionate users. It’s a red flag to me if you had to give away equity that early to get someone interested in your project, but not so interested as to invest themselves. Advisors are not for pre Series A companies, in my opinion.”

  • “For the really successful startups, you will end up sacrificing a lot of your personal life. If you hear someone say, ‘Oh, work 4 days a week,’ that doesn’t work until you’ve already nailed it. You have a finite amount of time until you run out of money, when you are pre-revenue. You have so little time until you can raise money or until you realize you never need to. Use it. The opportunity cost of your time in the early days is so high."

  • "If work-life balance is important to you, there are better and far easier ways to make money than startups. Investing in them, for instance.”

*You're amazing*


RECIPE FOR SUCCESS!:

Before the night continued with in-depth connecting among attendees, we talked about what makes for a good investment in the oftentimes crushingly tough startup world. Some of the key takeaways:

  • "A huge growing market, usually, or one you can expand dramatically with your product that is 10x better or 10x cheaper than alternatives, or that is 10x better for a niche in the market. Product/market fit. Founder/market fit. Determined founder(s). A product that has loyal fanatical users, however few they might be for now. A product that is so good the passionate users tell their friends about it."

  • “Minority and female founders can have a much harder time raising money, and I’ve noticed I invest in them more and more often than others typically do.”

  • "Investors often shun solo founders early on. Not me. Solo founders have unfair advantages, so if they aren’t solo for the wrong reasons, they have a huge edge. Unfair advantages like having so much extra equity to use for first hires or to give away in fundraising dilution when necessary. Equity to get 10 CTOs instead of 1, after they’ve proven things out and folks are happy to get 5% each. And a solo founder has got to be even more determined than the others to go it alone that long, to push through, to survive. Often to the point they can be a little (but not too hard, please!) to work with."

  • When you have great conviction, that’s when you go against conventional wisdom: “Many huge tech companies today had a hard time fundraising back in their early days. Uber was on AngelList where most everyone missed it. Read TechCrunch comments and do the opposite, and you’d have a very successful investing track record over the last few years, I read recently.


A SUCCESSFUL EVENING

The rest of the evening was fueled by these candid learning lesson. One thing is certain. You can't make it as a founder, if you aren't determined - but being honest with yourself on what is working, and what isn't is equally important. The candor, the rawness, and the determination, added to the incredible buzz in the room; and we know it will be an evening, that will have played a pivotal role in the course of at least a few lives.

==> Head here: to view more pictures of the event + learn more about Dreamers // Doers.


 

PS: Some nifty Social Cards - created by our friends at Fiverr via this female designer (+if you want to try out Fiverr - you can use code DDFiverr for 20% off your first order) 🌟

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