Sharing thoughts

This mistake is a bit different than the mistake of building the wrong founding team.

Entrepreneurs are like parents, sometimes they get attached to their products too much as if it was their own baby. In an essence, it is but the baby doesn’t need only food (or so I was told).

Not making sense? well the point I am trying to make is that when you have a product you tend to put all your focus on it, and forget that there are other areas needed for this product to flourish.

Allow me to give you an example, say you have an app or an IT platform that you built your startup around, the tendency here would be to get as many developers as you can to ensure the product is perfect. However, you need to pause, step back and think about the factors that make a product successful and then hire people accordingly.

In general, you need to build the right foundation and infrastructure in order for the team to take the  product and turn it into a company. To do so, here are some basic steps to get you started:

• Identify the skill sets you already have in the team, and assess whether you have enough people with these skill sets, too few, or too many.
• Read about successful companies that offer similar products to yours, learn from their team structure, the type of people they have, and the job postings they advertise for
• Go back the drawing board and try to understand what would it take for this product to be successful, define that based on your strategy, is it B2C, B2B, or B2G, does the success of this product depend on being marketing intensive or sales intensive team? Do you need to educate your customers / clients, and if so, do you have a strong communication person in the team? Is your product’s value in the ease of use, and if so, do you have a great UI expert? Does your product depend on being showcased in the media, if so, do you have a strong public relation expert? and so on.
• Don’t settle for C, or even B players. (OK, sometimes you need to accept B players), but in general aim for A players to fill the positions that are in the critical path of success for your company. If you depend on marketing to succeed, invest a lot in a good marketing strategy and employees. If you don’t have access to local talents, reach out online. Many major successful products have team members spread across the world
• If the current team doesn’t have an important skill your company needs, and you can’t find a suitable team member to hire, think of out-sourcing for a short period of time. Don’t wait for the perfect candidate (because he/she doesn’t exist)
• Perform gap analysis periodically to map the needed set of skills, vs what you have in the team. Always make sure the skills needed for the growth and success are filled with the right people, Always.

These are just small steps you can take to ensure that you are not a product-focused manager, but rather a company-focused leader. What matters is the growth and sustainability of your company, not the number of features you add to your products or the number of services you offer.

Having said that, I do NOT mean to compromise the quality of the product, what I meant above is the additional “nice-to-have” features/services that normally get entrepreneurs excited and cause them to forget to reap the benefits of the core offering.

I wish you the best of luck building the right team!

Part of the terms that we talked about in the last post, I would like to stress on the importance of the amount of the fund you are asking for.

Yes of course, more money is always welcomed. However, this could be an issue that you need to watch out for.

When you think of the amount of the fund needed, be careful. Asking for too little might choke you, and asking for too much might spoil you! Yes you read it right, entrepreneurs get spoiled by big cash.

In our case, we asked for too much fund at the start, and this taught us a lot of good lessons.

In general, some of the adverse effects of getting a fund bigger than you actually need:

• You give away more equity than what you should
• You might lose focus on the cost items that really matter to your growth
• You get more experimenting and lenient with hiring, instead of spending the right efforts to get the right people
• You might not focus on optimizing your operations and processes. This will burn you cash faster and you would need to raise fund sooner than you expected
• You might lose track of the core of your startup, and get more driven by too much innovation at the early stage. Innovation is good, but as a startup, founders need to focus and perfect one hero product
• You could spoil yourself or the team by paying for fancy stuff, because you know there’s a lot of cash in the bank

Having said that, if you manage to get a real tough CFO / Finance manager to keep you on track, and/or you have developed a good financial discipline within your company, having bigger fund might help you grow faster and achieve some of the startup’s goals sooner. It could also put you at ease when issues or troubles come your way.

On the other side, having a smaller fund than you need could:

• Limit your ability to spend on growth related items
• Delay the achievement of some goals (being focused on cost optimization / cutting costs)
• Waste some of your key people’s valuable time on mechanical tasks
• Affect the spirit of your employees, which introduce the risk of losing team members
• Push you to raise another round of funds sooner than needed which leads to losing more equity

Don’t panic, there are some mitigation steps you can take to avoid both of the above scenarios. You can:

• Spend extra good efforts on your financial plan and make sure you run it by experts who are aware of the LOCAL context. Also plan for a reasonable buffer for unexpected events
• Introduce proper accounting and financial management in your startup AS SOON AS POSSIBLE
• Create and track financial related KPIs for your company.
• Keep the board of directors informed monthly, if not weekly, on the financial status of the company
• Invest your own money in the company (if you have), and if you don’t, then truly feel that the money being spent is coming out of YOUR OWN POCKET
• Learn from startups similar to you (in size or scope) how they spend and what mistakes you should avoid
• Always, ALWAYS, think of optimized ways to get what you want EVEN if you have the money for it. This could be by learning about tricks in the procurement field.
• Be creative in incentivizing your team through non-financial means
• Terminate unhealthy contracts and fire dead weight staff, these things eat up your money insanely
• Review your plans quarterly to ensure you are on track and to fix issues early on

These are not all the ways you can avoid the effects of the wrong fund amount, but I hope they would alert you to plan better.

Good luck!!

 

You reached this stage, GREAT. This means you are on the right track.

Be careful however as the next step is trickier than you think. Although the investor agreed to back you up, you both still have to take the legal route and sign on the term sheet.

In the world of entrepreneurs, getting to the term sheet stage is already a reason to party, but the tough challenge now is to ensure that what is in this term sheet won’t hurt your company on the short and long run.

Note: term sheet is the agreement that you will sign on with the investors and it has all the terms and conditions you both have to agree on. NO it’s not another software agreement you can skip, this could be the most critical document you will sign in your life (I have to be dramatic here to get your attention).

Anyways, here are few steps you must do to ensure protection of your rights, company, and future:

• Don’t get over excited and sign immediately. Trust is great and all, but this is business and trust has just a small place in it.
• Read the agreement once, twice, 10 times, until you personally feel comfortable with the terms. Don’t jump to the excuse that you are not a “legal” expert. These agreements are not written in gibberish, which means you can actually read them and understand them. Let’s not put the legal experience as a barrier and let’s read every word.
• Now that you got a bit comfortable with the agreement (and if not, put some comments and questions on it for later discussions with the investor), run it by a legal expert or a lawyer. These people read between the lines and might alert you to tricky terms that could make you vulnerable. Having said that, be careful as they take things way too strictly and might hinder you from signing with the investor.
• Combine your comments with the legal experts’ comments and share it with the investor. Keep the balance that makes sense to you and your plans. Don’t be too nice with the investor, and in the same time don’t be too rigid to the point where it makes you lose the deal. You are the only one who can decide on the right level of compromise.

From my humble experience and interactions with investors, here are few critical points you have to understand in your term sheet:

• Shares distribution: make sure that the term share states the shares distribution between you and the investor exactly as you agreed on (both percentage wise (%) and number of shares)
• Board of directors (BoD) formation: some investors like to control the board and some don’t. Be sure to check the terms that breaks down the number of board members, who they are, and who appoints them. Also be comfortable with the chairman of the board mentioned in the term sheet
• Board decisions vs CEO decisions: This is one of the most important terms to check. The last thing you want is to be an operational CEO with little impact on the company’s strategy. Review the rights of the board and the rights of the CEO VERY CAREFULLY before you sign
• Voting in the board: Control is key, especially in the early stages of your startup. If you give control away, then you almost turned into just an employee of your startup. Voting for key decisions during board meetings could take the company to vastly different directions. I would recommend that you (and your co-founders) keep the voting rights to your side. This term could be very complicated and tricky, so get some help from a lawyer if you feel stuck.
• Terms that might affect future fund series: some investors inject terms that protect them in the future fund raising rounds. Some of these terms might represent a disadvantage to the future investors and hence could reduce your chances of getting more fund. However, given that the current investor backed you up early on, it’s fair to give them some protection. For such terms, think of the right balance and seek the help from seasoned entrepreneurs as they have been through it and could help you greatly. Some key words here to pay attention to (just to name a few) : “preferred shares”, “IP rights”, “anti-dilution”, “pro-rata rights”, “control rights” and the very important one: “Right of first refusal“

 

Now, trust me, i didn’t write the above to scare you or make it sound like a nightmare. But considering how important the first fund/incubation is to your company, you really have to give the proper needed time for this agreement and sign on it when you are 100% comfortable.

The bright side though, you found someone who believes in your startup and willing to invest in it!!

(p.s: invite me to the party if any).

Securing your startup financially is one of the most important achievement you should look for. You had an idea, you built a prototype, you assembled a team, and now it’s time to bring some money to grow the idea to a fully sustainable business.

As mentioned in many books and articles, there are many ways to secure a fund, either through family and friends, or through bootstrapping, or having an investor on board, etc. However, since I only have an experience with the last approach (securing an investor), I will be talking about that here.

Please note that I am not here to lecture, I know sometimes the entrepreneur feels so desperate for fund that he doesn’t care much where it is coming from. This is totally understandable and even sometimes encouraged. At the end, to struggle with some challenges with the investor is much better than seeing the idea die because of the lack of fund.

Anyway, IF YOU HAVE A CHOICE, I would highly recommend thinking wisely about the type of investor you are bringing on board. This decision could be the difference maker in terms of succeeding or failing. Now, I know I might say this exact statement for many of the mistakes in this series, partially because in reality they do have a large impact and partially because I lived through them and some mistakes could affect us more than other startups, as each startup has its own flavor and nature.

Depending on your stage and progress with your startup, you might need different types of investors. Below are some examples:

• A startup might need only cash from the investor, without any need for management or development support. They might be advanced with their product and created a sustainable revenues, and now they just need to grow
• A startup might need cash and guidance, as they are still in the early stages and the experience of the investor will help them make better decision. In this case, make sure you choose the right investor who will add value and who has invested in similar companies before. A lot of investors give promises of support and help, but when the “wind” hits the fan, you might be left all alone.
• A startup might need only strategic partnerships and connections and they use the investor’s big outreach for that, while trading in return some shares

The point here is that you have to define the purpose of the fund / incubation you are targeting, if you define the end goal then you can investigate whether this investor is fit for that journey or not. Picking the wrong investor could not only harm your business growth, but it could also harm your potential for partnerships and further rounds of funds in the future. I can’t stress it enough, BE CAREFUL. Here are some points that could help you tackle this:

• Does the investor (or the investment team) have experience in your line of business?
• Did the investor (or the investment firm) invest in similar companies? and if so, were they successful? Visit these companies and learn from them about the experience with the investor
• Does the investor’s expectations match yours? For example, if you are B2C focused, would they be? if you are looking to gain user base not revenues, will they support that?
• Is the investor capable of assembling a great advisory board for your startup? Do they have the connections?
• What other support could the investor / incubator provide? (marketing channels, sales connections, business partnerships, financial knowledge, etc). Obviously the more the better.
• Can the investor be also a client? (directly or through a sister-entity)

Even sometimes you might feel option-less, push your creativity to the limit and try to find other options in order for you to think better and who knows, maybe negotiate better.

The more efforts you put into securing the RIGHT investor (incubator), the bigger chances of success you would have.

 

Say you assembled the team, and you are ready to share with the world your genius idea. The next question would be, where should my company be located?

Now, I understand that some ideas and startups can work anywhere anytime given the nature of their business, but nonetheless you still need a location of some sort to handle the legal matters such as CR (commercial registration, no not cute rabbit), the financial transactions (getting paid and what not), the documentation of shareholders agreements, and others.

A friendly alert: be careful of your choice as it could impact the future of your business dramatically.

In our case for example, we decided to locate our business fully in Saudi Arabia. Now that had its advantages and disadvantages, but we agreed that it’s the location that makes sense for us.

Here are few things to consider while thinking of your startup location:

• How easy is it to set up the legal entity? (you can use the “Ease of Doing Business Index” as a reference)
• What type of investor are you looking to attract? (local vs international, is there a certain risk that might discourage international investors? laws and regulations that protect both you and the investors)
• Where do you expect the biggest chunk of your revenues to come from? (online vs offline, which country, etc).
• You have to also consider the social norms in the location, and the views of local companies vs international ones.
• How efficient is the payment system in that location, and does it have several options? (for example credit cards in certain countries are not as common as others)
• (—>  this is a commercial break .. in case you got bored of this article already <—-)
• Trade regulations (specially external ones like export and import, customs, etc)
• Taxes and IP / patent registration

Finally, in brief I would highly recommend avoiding registering your company in a place where it could:

• Give you a lower level of protection for your own IP, ownership, or personal liability
• Hinder your business progress by having complicated and inefficient regulations and laws (where you end up spending a lot of money and effort to deal with legality that you lose focus on your core business)
• Hinder your company’s growth and potential for international markets / partnerships

 

Obviously, I can’t cover all risks and issues that could result in choosing a certain location for your startup, as I am not the oracle of that topic, and for sure there’s no such location as the perfect location, but all what I am trying to say here is that please think carefully before registering your company somewhere and make sure it has low risks on your business.

Thanks for reading the second article, almost there, 38 to go.

 

OK, so you have found an amazing idea that will change the world. This idea has been keeping you up at night and you have thought of ways to make it a reality over and over again. Great!

Since we all know that one hand can’t clap, you are now thinking who can help you out and be part of your founding team. STOP! don’t do the mistake of reaching out to friends and family JUST because they are friends and family.

This first choice you will make, is the most important in your next 3-year journey. Pick the right partners that could actually help the business and not because they make you feel comfortable. You and your friends could be amazingly smart and sharp, but are you all smart and sharp in the right fields needed to grow the company?

Some questions to ask before you choose your founding partners:

• Are they better than you, or a copy of you, or worse than you? (be pragmatic please)
• Do you have the diversity of experience / education / passion that could drive the business?
• Have you worked together before? and if so, was it a pleasant experience?
• Is your connection (friendship or family) going to make you shy away from challenging each other?

In my case, I had an amazing founding team. However what we oversaw was the fact that we shared the same experiences and education which made it really hard for us to cover other demanding sides of the business.

In short, think carefully about who would help taking this amazing idea of yours to excellence and who would have the patience, endurance and time to basically have no life for the near future.

As ideal as it may sound, if you can make a reasonable team of founders with the following set of skills, then you have better chances of succeeding faster:

• Sales / marketing / business development
• Technical
• Finance management and
• Strategy / planning

That’s it for this mistake. I hope it made sense and remember, founders are for business and they could be your friends, but not your friends that could be for business.

p.s: you can still hang out with your friends after work, that is if you find time to have a life (evil smile).