Top Startup Mistake #1 - War Stories From A Seasoned CEO

Once I was acting as President at a small startup that was spending money at a rate of over $350K per month when I arrived and did not yet have any sales, marketing, or operations staff.  Virtually everything was going towards product development, with no expertise in the house on anything else to divert resources there.  The founders were both very bright technical people and built a huge development group, just like the one they had back at their former big company.  This proved to be the company's downfall when combined with market factors because all the money was spent assuming more would be easy to get later.  However, this was not their fault really.  The novice IT investors running the incubator were also from big companies, used to big numbers and larger biotech investments.  These fund managers allowed the two technical people to run the company and decided not to bring in a CEO until about 90% of their investment had already been spent.   This proved to be penny wise and pound foolish, as the CEO’s salary would have been a small fraction of the wasted money.  Even a part-time CEO could have averted this disaster easily during the first 18 months. Of the $5 million spent, at least half was wasted because they did not develop an MVP product but built the perfect “battleship” instead.  This was the thinking in the Internet bubble time but I think mostly because very these VCs did not understand the software well.  Spend because money is easy to get. Always a bad thing.

Example #1 - The Legal Contract

One of the biggest faux pauxs I discovered was an out-of-control "let someone else do it attitude".  This is where managers do nothing except try to "manage" it.  However, in their mind managing it is paying someone else to do it, so they don't have to, and so they have no real liability for any failure and effectively make no real value contribution.  Not the startup way where everyone should be doing three jobs, not none.  They just did nothing, so they can blame it on the third party.  Big company politics and style, not startup mode. 

One great example was where the company needed a legal contract pulled together for its enterprise software license. The operations manager, who spent most of his career in big companies, did just what he would have done at those big companies.  He called a Lawyer to get a contract drawn up from scratch.  Unfortunately, with no in-house counsel who was motivated to do it in minimum time, it was sent to the outside law firm with the exact opposite motivation.  No law firm can or should be trusted to do things efficiently. In fact, most law firms, and the entire judiciary industry’s, modus operandi is to spread it over as much time and billable hours as possible.  Death to a startup, really. Also, somewhat immoral in my view. 

By the time we saw the first legal bill for this contract, it had been drafted from scratch, edited, circulated around the firm to four different lawyers, without consulting the client, and the bill was over $15,000. The fact of the matter was that remarkably similar contracts were available for free at numerous enterprise software company websites to copy and then edit in some customizations we needed.  I would have done 90% of that myself at no cost.  This would have been the "startup" way to do it.  Of course, we would have gotten a final legal review too, but the bill would have been ten percent of what was spent in this instance.  It was a total waste of money and in my view enough to fire this law firm.  But they were too friendly with the venture partners.  They had no clue what a startup is and how to have one as a client.  This is why I typically hire a sole practitioner, not a firm, until a company reaches at least $1 million annual revenue.  Startups manage risk every day, and Attorneys spend a fortune trying to make risk zero when the downside is less than the cost of the legal bill they generate. We had zero customers and this was boilerplate stuff mainly.