Have you ever caught yourself saying to someone that it’s not what they say, but what they do that counts? This holds true in most aspects of life, including how and why investments do and don’t pay off.
I’ve been a fundamental investor in the stock market since I was 19. I prefer not to discuss how many market cycles that covers, but I have some experience. The only time I make big moves with my portfolio is when I see leading economic indicators, like an inverted yield curve, or a major change in an individual company’s fundamentals, like taking on new debt without a real growth plan. Now that we have made over 100 startup investments, I realize, and have the data to back up, that there are leading signals at the very earliest stages of company formation. It’s fascinating! And it has the power to pay off very nicely.
We work with the entrepreneurs we invest in on a daily basis, so I observe a lot of what they do with their time and energy. I’ve come to learn (and have substantial data to back up) that there are certain behaviors that are leading signals of both success and failure. Currently, investors receive lagging signals in the form of quarterly or annual reports. In tough times, they might get a call from the founders – usually after it’s too late. The best way to observe these signals is to get involved as an advisor or mentor before you invest, or make a small investment and observe via weekly updates. Then double down if the founders are exhibiting more success behaviors than failure behaviors.
One of our founders told me recently that the most useful information he has received from our mentors is things not to do. So I’m starting this series with the leading behavioral signals of early stage failure. For entrepreneurs, this list will hopefully serve as a reminder of how to not spend your precious time and energy.
First up is something that is rampant in the startup community, and highly detrimental to any founders wanting to build a scalable company. The good news is that it’s easiest to avoid!
There are two resources that a startup founder should protect at all costs. One is their time. The other is their energy. These are finite resources that need to be maximized, which is what the best entrepreneurs learn to do. Unfortunately, some people will attempt to throw you off your game. Most of the time they don’t even realize they are doing it, and that it will lead to your startup’s death. Indulging in gossip is one of the most observable behaviors of ultimate failure.
I remind our team on a regular basis that they need to be on the lookout for this, and to either not engage or try to shut it down (i.e. change the subject). We are all guilty at some point (yours truly included). It’s an indulgence to talk about others to make ourselves feel or look better. But let’s be honest, that is the only reason we’re doing it. It certainly is not building or selling product.
The effects are disastrous. At its core, you are not focusing on building a solution or working on your company. It indicates a lack of focus, which is a top killer of startups.
At the edges, you’re making the world a little shittier place. You’re destroying trust. Trust plays an important role in scaling a business. Burn too many bridges by spreading gossip and others will choose not to work with or support you.
The best way to remedy this is to change the conversation. If you find yourself gossiping about others, don’t feel guilty, but don’t continue to indulge. Both make the situation worse. Instead, try to figure out why you’re tearing someone else down. Then solve that problem. Are you worried about something? Stressed? Jealous? Now solve for your own problem rather than making it someone else’s. I find switching the subject to travel is a great way to learn more about people and blow off steam dreaming about the places my company will take me. Or just ask about the person across the table from you. There’s no one we like talking about more than ourselves. Stay curious!
2. Failure to build and work a pipeline
Failure to build and work a pipeline is the easiest behavior for a mentor to intervene and help with. It indicates inexperience with sales, which means a little education and support can fix it. Seriously, it typically takes one conversation for the aha moment to hit. Then it’s a matter of education and discipline.
The easiest way to figure out if you’re guilty of not working a real pipeline is if you use phrases like “as soon as we close this one account, everything will be great.” Or “we just need this one reference account and then we’ll start selling.” Yes, engineers, I’m looking at you. Believe it or not, 90% of successful sales come from having a good system in place, not from being a “rainmaker”. You can definitely handle that.
If you’re struggling with this, there are some great resources out there on how to think about working a pipeline. It’s way simpler than it seems though. You need to have multiple prospects at different levels of closing. Start with 10 people or companies in your target market and learn about how they buy. Keep adding new leads on a regular basis and track what it takes to close them. Use a CRM tool to keep yourself organized. The extra planning will pay off in huge ways. We like Hubspot because it's all in one, but there are plenty of platforms that can help you out.
You may be suffering from a combination of problems, which brings us to our third signal.
3. Failure to Launch
It’s easy to observe a company that suffers from failure to launch syndrome – they never launch a product, or they do a lot of pilots that are never productized. There are typically two underlying causes; you’re either over technical and looking for perfection, or you’re under technical and inexperienced with managing technical people.
The over technical team
Leading signals from the over technical failure to launch startups include not setting a rigid launch schedule, or not following the one you set. Simple right? I can hear the reasons now. “But we had to change our architecture.” or “the back end is really complicated and we haven’t gotten to the front end yet.” The second example is particularly risky because it may mean their UX isn’t planned out according to what the customer needs in usability. Either way, you’re on your way to running out of one of your most precious resources…time. And you haven’t allowed for the possibility of user feedback to design the most important features for your customers rather than what you think is important.
The under technical team
Here is how to recognize this startup. Pre funding, the team talks about either “finding their developer” or “as soon as I get $250K, this dev shop will build the product for me.” Post funding, and after spending hundreds of thousands, or possibly millions of dollars, you may hear that the dev shop doesn’t know what they’re doing, or that developers just don’t get it.
The solution to remedy both types of founder behavior is to expect a very specific, detailed plan for product development in short sprints (understanding the areas that will change based on user feedback, which will change up the sprints). Expect to see detailed workflows, wireframes and user stories. For the nontechnical, if they can’t answer basic questions on what back end and front end technologies will be used, don’t invest until they can. And hold each of them to deadlines.
For founders, my advice is the same. Until you can show that you have thought your solution through in detail, with the customer in mind, you should not be asking for investment. This is your job, not a developer’s or designer’s. And you will have to manage development on a strict timeline with daily and weekly check-ins. If you don’t, both you and the developer or shop, will be sorely disappointed in the results. This is one of the leading causes of the fourth failure signal.
4. Cofounder fighting and divorce
Nothing is a more spectacular failure signal than cofounders fighting and breaking up. The underlying reasons are many, but they typically boil down to either partnering with the wrong person, or lack of communication. Many times it is both.
Again, both of the underlying causes can be worked on by the founder who truly cares to build a scalable company, but it isn’t easy. Why? Because now we are into people issues. This is by far the most critical behavior to watch for because there is no such thing as a scalable company with only one person.
First, an important discussion. Is all “fighting” bad? Absolutely not. Sometimes it takes heated discussions and disagreements to get to the best solution to a given problem. Not everyone can discern between respectful disagreement and disrespectful tearing down. In fact, there is no difference. There is only perception.
What we suggest is a cofounder agreement, something like a prenup, that details how decisions will be made and what will happen if things go north or south (both create issues). There is no perfect way to develop one, but the discussions it requires will go a long way to building the trust and communication paths necessary to grow your company together long-term.
Our Gauntlet methodology incentivizes the recognition and avoidance of each of these behaviors. It has been an eye opening experience to see our founders handle each of these early on and not waste shareholder capital figuring them out too late. They're hitting the "aha moments" faster, and placing emphasis on solving customer problems. They're focusing their energy on what matters.
To learn more, check out our latest zero equity program designed to get founders on track and plugged in to the best resources: Gauntlet Bootcamp