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Identifying pitfalls: How to help clients avoid common mistakes

by Linda Knopp

June/July 2009

Entrepreneurs can learn from the successes and failures of others. Find out how you can identify mistakes many early-stage entrepreneurs make in areas such as ownership, funding, product development, marketing and management, so you can help keep your clients on the road to success.

After 30-odd years of working with entrepreneurs as a lawyer and an incubator manager, Booker Schmidt has seen pretty much every mistake a business owner can make. But many times, he says, the missteps that can spell disaster for a start-up company could be avoided through effective business coaching.

Although each client’s situation is different, many of the mistakes entrepreneurs make follow similar themes – problems with ownership, funding, product development, management and marketing, says Schmidt, executive director of the Gainesville Technology Enterprise Center in Gainesville, Fla.

Read on to learn more about some of the most common mistakes entrepreneurs make – and how you can help your clients avoid similar missteps.

Too many captains of the ship

Many start-ups operate under a share and share-alike philosophy. But having each shareholder own equal pieces of a company can bring the firm to a screeching stop. “With equal ownership, decisions generally have to be made by consensus to preserve the peace,” Schmidt says. “And if the management deadlocks, you may need a legal agreement to break the deadlock.” In those cases, he says, an outsider – often someone with little or no knowledge of the company – could end up being the person to make decisions.

A better option is to understand that unequal ownership might be best. Give one person – the CEO – majority ownership and make this person ultimately responsible for the success or failure of the company.

The lone sailor

Although one person must take the lead, no one can create success on his or her own. “It takes a talented team to make a company a success, and a smart business owner understands that to keep that team, he or she will have to share ownership,” Schmidt says. If members of the management team don’t have a stake in the business, they don’t have as much incentive to help the firm grow.

By sharing the wealth with other founders and key management team members, others will be motivated to help the company grow. “With ownership and the prospect of significant financial rewards, management will be motivated to work hard and make the company a success,” Schmidt says. “The founder should ask himself or herself, ‘Which is more valuable: 10 percent of a $20 million company or 100 percent of a $1 million company?’”

Not enough money in the bank

One of the most common reasons start-up companies fail is because they lack sufficient start-up and operating funds, Schmidt says. Entrepreneurs often underestimate the amount of money and time it will take before the firm starts receiving revenue and reaches a positive cash flow.

He says smart entrepreneurs use the two-times or three-times philosophy: They plan for things to take two to three times longer and cost two to three times more than expected. “They appreciate that cash is hard to obtain and critical to a start-up, so they spend their dollars wisely and always know where to obtain more operating cash to handle the unexpected events and crises that crop up,” Schmidt says.

Relying on “vapor” commitments

Verbal commitments of sales, funding or other agreements can vaporize as quickly as they materialize. So smart start-ups don’t consider a commitment a firm one until the order is placed, the money is in the bank or the agreement is signed. “People change their minds, so you should never consider a commitment to be a firm one until it really is,” Schmidt says.

Accepting money from anyone

Although money is important to any business – especially a start-up – not all money is created equal. Some funding comes with strings attached. “Once someone invests, they can be difficult to get rid of or deal with,” Schmidt says. Good investors truly are angels, he says – they provide good connections, constructive advice and support of the management team. Schmidt advises entrepreneurs to find out all they can about a potential investor before accepting any cash by talking with accountants, business consultants and other entrepreneurs who know the potential investor. “If you find out about the last five deals they were involved in, you’ll get a good flavor for the type of investor they are.”

The ‘better mousetrap’ syndrome

Many scientists and engineers, in particular, believe that if they build a great new product, everyone will buy it. “But then they build it, and no one buys it,” Schmidt says. Smart entrepreneurs decide what products and services to offer by matching their offerings to a particular market need. Too many times, though, companies spend so much time and money developing a new product idea that isn’t worth investing in or what Schmidt calls the “butterfly effect” – chasing every opportunity that presents itself. Smart companies, he says, sort through the opportunities that are out there and pursue only those that help the firms achieve their goals and objectives. “Try to get companies to focus on 30 days, 90 days, six months, a year – and then help them focus on progress,” Schmidt says.

Making plans based on early successes

Early success can be dangerous for a start-up, if the company’s leaders make future plans based on those results. For example, some firms expand based on what they perceive the demand for their product or service will be without recognizing that the market might change. Instead, Schmidt advises that firms achieving early success should plan for steady growth, matching the company’s growth and expansion to real customer demand. “Smart companies appreciate that you don’t have to grow as fast as possible,” he says. “It’s better to lose sales rather than to jeopardize the company.”

Being too optimistic

Perseverance and tenacity are two traits that contribute to entrepreneurs’ successes – or their downfall. Because most entrepreneurs by nature are optimistic, many continue to believe that things will be fine even when all signs point to the contrary. To be successful, business owners need to look closely – and often – at how well what they’re actually seeing matches with the initial projections and make adjustments from there. “Have a contingency plan,” Schmidt advises. “Great entrepreneurs don’t roll the dice, and they don’t bet the ranch. They keep their options open to keep their companies alive.”

This article is based on “Helping Early-Stage Entrepreneurs Avoid Common Mistakes,” a session presented by Schmidt at NBIA’s 21st International Conference on Business Incubation in Seattle. Schmidt also presented this session as an NBIA Webinar. For more information on this topic, you may purchase the archived Webinar through the NBIA Bookstore at www.nbia.org/store.

Other tips for new entrepreneurs

  • Get a “good-enough” product out on the market. Then, once customers are using it, sell upgrades. About one-third of new software products never get launched because their developers are too focused on creating the “perfect” product.
  • Don’t be too attached to a product or service that isn’t working – even if you’ve already invested time and money into its development. Schmidt advises that entrepreneurs ask themselves, “Would we invest time and money on this project today if it were presented as a new opportunity?” before continuing.
  • Don’t let one person wear all the hats within an organization. CEOs should focus on their strengths and delegate responsibilities in areas where they’re weak.
  • Clearly define and communicate the company’s goals and objectives to everyone on your staff. Growing a successful company requires a team effort. Of course, you also must revisit – and oftentimes adjust – your goals as market conditions change.
  • Avoid “dropkick” products – those that require customers to drop what they’re currently using for an entirely new product. Instead, focus on products and services that offer incremental improvement over what’s already on the market – especially during tough economic times.

Keywords: accounting/financial management -- client, business planning -- client, coaching clients, professional development -- client

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