Entrepreneurship - 10 common mistakes in start-up

I do in my spare time some philanthropic activities with the Chamber of Commerce. I do help young entrepreneur to prepare their Business Cases and I do consultative coaching in the start-up phase of their adventure…

These are the 10 most common mistakes I serially see in those interesting meetings.

  1. Setup the new company on the base of 2 people idea, splitting the ownership to 50% each.  A lot of new startup begin with 2 friends having a brilliant idea and deciding to invest together to make it real. Usually people make the assumption that having one strong friendship will translate into a similar energy in the working arena. It’s wrong!!! Better will be to have 3 to 5 associates to build real democracy in taking decisions. Have seen may start-up failing the first year because of that.
  2. A single Customer with a weight of more than 30% of revenue. This is a typical case for all those start-up that get created with a need that has been expressed by a Client. It look great to start it with an existing Client. The issue is that the focus of building new clients get defocus by the need of delivering to the first one. In less than a blink the start-up get too dependent from the initial client and at the minimum market condition change the start-up is out of business.
  3. Who does what? Every start-up must have the right choice of the associates. It is fine to dream about getting together as friends and revolutionize the world. Most of the start-up born in this way… Defining what each one is going to do is fundamentally critical!!!  It looks simple but it is one of the spotted issues I found when I’m helping young entrepreneurs. Let’s start with a magic number of 3 associates, this is the ideal situation with 3 operational associates taking care of the 3 key functions: Production, Sales and Administration. The 3 associates must be different in their personal skills, but similar from the cultural extraction. The decision of who does what must be driven by their personal characteristics, so the sales owner will be personable, optimistic and will have good reaction to negative answers. He’ll be a good communicator and planner. The production owner will be the one with technical expertise, leadership and a good sense of timing. The Administration one will be the rational guy, less influenced by the excitement of the sales person and very strict on the production promises.  He/she will put on the table continuously the reality check between costs and benefits of any activities.
  4. Pricing strategy. This is historically a big debated area. I see continuously new start-up doing the same mistake of entering the market with a very competitive price. Most of the new companies believe that having a low price will help in capturing clients from competitors. This is very rarely a good strategy as the existing competitors can endorse a price war for longer than a start-up. Frequently the same range prices (sometimes even a bit higher), help in establish brand recognition, especially when the market awareness is made around a value proposition that create a real differentiation.
  5. Capital Risk. Starting a new company with not enough money it is a typical mistake. The positive and optimistic mindset required to initiate this type of adventure is not compatible with the grounded need of cash in the initial phases of the new born company. A good rule of thumb I use to judge and help new business plan submitted are to double the required initial capital and to divide by half the estimated expected revenue in the initial 3 years. If the assumption allow to have the business plan not getting dark red… it is feasible…
  6. Lack of Focus. At the beginning it is easy to jump on any opportunity if this produce revenue… a start-up need to define ahead what are the core competencies for them and to understand that only with a focused approach it is possible to develop a knowhow that will help the company to differentiate. The start-up must think long term and select opportunities with a good trade off for what is necessary in the short term and what is a good business for the long run…
  7. The right team. Frequently the founders of a start-up do not invest the right level of time and energy in the workforce selection. The starting block rush and the willingness to rapidly produce results bring sometimes the wrong mixture in the equation. We may want a guy with a strong experience in the domain and so we may look for someone that has at least 7 years experience. We may just hire this person and discover that those 7 years are 1 year in 7 companies.  We must make sure that we do hire the best candidates, and it make sense to get experienced help in this domain. Another area is the investment in training and development… if you want to get someone highly motivated and comfortable in a continuous changing environment (like a start-up), it is fundamental to make sure your people get the best help to succeed
  8. Market Inertia. Most of the start-up believe that it will not be difficult to find new clients and believes that they will be capable to capture new clients from competition. This is a real nightmare, because there are multiple aspects that make an existing relationship strong, and most of those are not visible, here some of them:
    – Penalties in case of broken contract
    – Service obtained satisfactory
    – Prices in the relationship discounted for old clients, making the start-up prices higher
    – Customer not really sensible to price point
    – Change management from one provider to another too expensive
    – Customer preferences difficult to change
    – Change resistance from top management due to personal relationship with existing provider
  9. Growth crisis. If thing go right at the beginning it is not impossible to see growth rate of 50% year over year. This growth require new addition of workforce. In a new company with a not consolidated corporate culture this can be the beginning of the end… cost control can be lost and usually high growing periods run in parallel with low profit. The objective must be to be profitable even if it does mean lower grow rates.
  10. Public relation. This is one of the area that more than other still surprise me. The believes that as we have a good product, clients will come and buy… it was probably true 30 years ago, but today it is very much important to use any media is possible to convey the message, the value proposition for the clients. Events, meetings, forums, conventions and all the digital approach of social networks must be used to create opinions and to express externally why the new start-up is different. It is fundamental to build knowledge and awareness using any opportunity to make sure the new player and the product is recognized. This associated with a branding will be the best communication tool.  My advice is to make any employee  the ambassador of the company, at different level and scale each person is a potential dispatcher of  the right message.

Hope you found it useful…

let me know what you think…

Stefano Burbui

3 comments to Entrepreneurship – 10 common mistakes in start-up companies

  • matteo

    ciao stefano,
    I strongly agree with your points about the right things to do while starting a new business.

    People, focus and strategy are the main to take care of since the very beginning.
    The sooner you define roles and responsabilities, the better the “company” will work.

    good and useful article!

  • Tim Retford

    Ciao Stefano!

    Great article and really good points… thanks for sharing them!

  • Hi Stefano,
    great post and food for thought.
    You are illustrating fairly well typical pitfalls of startups and entrepreneurship in Europe. There are however some key differences with what happens in the US. For once, over there access to venture capital or angel investor money is much easier, if nothing else because there are many many more of them. I myself had the opportunity a few years ago to advise an Italian VC fund manager working for a major corporate investment and banking group, and read a good number of business plans too. What I noticed is how small and close the local VC community is. In that context, connections (who you know) win over business case and time-to-profit, that in turns always wins over vision.
    Second major difference is that often in the US there is a risk of raising too much money, and this can kill a startup even faster than having not enough. There are plenty of horror stories of companies having burned in a few month through million of dollars by building infrastructure and services preparing for a business and amount of customer that simply never showed up. The third difference is that in the US there is much more respect for “visionary” startups. These are the ones built in college dormitories, or Starbucks cafe’, usually by young and clever guys that are trying to change the world, or at least make it a better place. Monetization and profit are often an afterthought, especially for internet start-ups. These are indeed – and very often – two people shows, and it works to their advantage: fast decision making, great flexibility, 100% accountability clarity. The forth and final difference is that in Europe there is not enough of a start-up culture in young people yet. Wanting to be an entrepreneur means accepting and almost welcoming failure, because when it happens it actually makes you stronger for your next try. It means that you were pushing the limits and dreaming something radically new. Try folding your company in Europe and then go seek seed funding…. almost guaranteed you will not get it.
    Keep up the good work.

Leave a Reply




You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>