Tan Kabra, the founder and CEO of LaunchByte, a four-year old accelerator and venture capital firm that coined the phrase, “reverse-angel,” says he has seen it all, from the good, the bad and the ugly when it comes to startups.
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But while many mistakes are inevitable for new companies, there are some gaffes that are commonly made but can easily be avoided, according to Kabra.
“These are the times in which a few mistakes, that seem unimportant or minor, can really set the company back months in time and capital, and ultimately lead to their death,” he says.
Here are the five most commonly mistakes startups usually make.
1. Seeking capital too aggressively
Kabra says “those who seek money, get advice and those who seek advice, get money. Nothing is more unattractive to a potential investor than a desperate founder.”
He says as a founder, when you meet or are introduced to someone who could help you “along the journey,” you should think very carefully before reaching out to them and possibly coming off the wrong way. His advice is to research the individual or group very carefully and when you first meet or are introduced to them, simply talk about what you are doing and let them ask the questions about the financing and growth before you start talking about it.
2. “You get a check! And you get a job! And you get a check!”
Kabra says it’s difficult to spend investor dollars slowly, but it’s not impossible.
“I can’t tell you how many times I have seen a pitch where the founders tell me that they raised $100K or $250K several months ago and are now ‘actively seeking new investors.’ A mistake that founders make, whether they realize they are making it or not, is securing an investment and then immediately going and blowing through it,” he says.
His advice is spend the cash at the early stages of your company wisely. The key is to find out what you need to close your next round of fundraising, and then build a list – based on needs – to work backwards.
3. MVP - Minimum Viable Product turned Maximum Viable Product
Kabra says it’s only natural that if you are paying for something, you want the most bang for your company’s buck. But when building your minimum viable product (MVP), which is the next round investors want to see before providing funding, adding everything under the sun can be the kiss of death.
His advice: Stick to the basics in the beginning and ditch the extra functionality add-ons.
4. Extrapolating projections
Kabra says there is not an accurate number that comes to mind when he tries to think about how many times he has seen pitches where revenue projections surpass the million dollar mark in less than two years. He says that mistake is known as a “classic logic trap,” and it is difficult for entrepreneurs to keep a steady and realistic mind when they keep hearing that companies are getting snapped up or are raising money in the hundreds of millions or even billions.
“When investors see this, they immediately see right through the numbers and find themselves sitting across from an entrepreneur that is looking at the endgame rather than where they are now. Even if you think you are going to do $1 million in Year 1, $2 million in Year 2, and $4 million in Year 3, then divide it by 10 and list that as your projections. It’s a win-win – the investors will see conservative numbers and if you do surpass them, then you look like a rockstar,” he says.
5. How do we get users? Easy, social media ads!
Kabra says probably one of the most cringeworthy and frequent mistakes that his company sees is companies and their founders running out of money because they finally had a product that was ready to go to market and their idea of an easy way out was to sit back in their chair and watch their $10,000 Facebook ad campaign do all the work.
“Don’t get me wrong – programmatic advertising, where you target certain demographics to display an advertisement can certainly work, but only if it is done with careful thought [as] to who and when and where the target is seeing it,” he says.
His advice: Beta users need to be a certain type of individual, the early stage (pre-scale) users need to be another type, and so on. Doing a mass market spam of ads not only shows it to people you don’t necessarily want on the platform at the current stage, but it also can make the brand look weak. So, founders need to think beyond just social media posts.
“The last thing investors want to see in a use-of-funds breakdown is how you plan to spend $100,000 over six months on social media ads. It’s a big red flag,” he adds.