10 Classic Rookie Mistakes

Thursday, July 26, 2007

The Venture Alliance, http://www.angelstrategies.com

During the “dot.com” boom, it seemed as if everyone was starting a business on Monday and getting rich by the end of the week. Pretty soon, everyone wanted to start a business, not wanting to miss out on the all the fun and (of course) the money. Then the bubble burst and those who were left found out pretty soon the realities of building a business, “if it were easy, everybody would do it.”
When you are in the business of helping others build their business, you see EVERYTHING. And,
although we can’t tell you the guaranteed formula for business success, we can tell you several things that
either DON’T WORK or, at the very least, will MAKE YOUR TASK HARDER. Here’s the top ten in
our book in no particular order. (Notice how many issues revolve around the people, not the idea!):

1. Building a business costs money:
For some reason, entrepreneurs seem to think that having a
million dollar idea entitles you to free services from everyone needed to build your business.
But, unless you have a working prototype of an anti-gravity gun (in which case, people will
throw money at you), I’d suggest you be prepared to invest at least $50,000-$100,000 of your
own money into your company. If you cannot afford that kind of sacrifice, then you’d best reconsider
the viability of your plans or, at the very least, have a very rich relative who loves
you.

2. YOU cannot do it ALL:
Few companies can be built around a single person. Yet, many of
the companies we see have founders who are trying to do it all. Some do it because they
haven’t the money to hire anyone, and others, because they don’t trust anyone. Either way,
they are dooming themselves early if they can’t duplicate themselves and build a team. And,
by the way, your team is not just those who carry a company business card, they are also your
investors, your board and those outside resources chosen to assist you.
And, speaking of resources, most entrepreneurs recognize they need a lawyer to start a
business, but few recognize that choosing a large, prestigious firm can actually cost less than a
local, boutique firm. Why? Because the larger firm can often afford to “take a chance” on a
smaller company that shows promise. But, even more important, large firms usually act as
credible feeders to the local VC firms looking for the next great opportunity to fund. After
choosing their lawyer, most early-stage companies take the attitude that they can’t afford any
more outside advisors, so they just try and muddle through on their own. Mistake! Selecting a
good outside advisor (whether as a consultant or board member) who has had considerable
experience in helping early-stage companies can save you months of wasted time, keep you
from making rookie mistakes, and teach you how to save thousands of dollars in wasted
expenses.

3. BOSS vs. LEADER:
Many entrepreneurs succeed because they have a powerful vision that
they cling to no matter what. This same trait can cause them to blur the line between being an
irritating boss that must always have their way and a charismatic leader that everyone wants to
follow. Know the difference and strive for the latter.
4. The importance of the TEAM: Building a business requires a broader set of talent than any
one entrepreneur can possibly possess. Three of the most important talents are (a) the ability
to SELL; (b) the ability to MANAGE PEOPLE and; (c) the ability to MANAGE MONEY.
The hardest part of starting a business is in figuring out where you most need the help and then
finding the best people to fill in YOUR gaps. Again, it is important to recognize that not all
team members must be full-time or employees. The key is in how you work together and your
ability to execute on the goals you set.

5. Stick to the BIG Ideas!:
If your idea is going to require someone else’s money, pick an idea
that will excite them! Generally speaking, only relatives will invest in a local restaurant or a
dress shop idea. The world will want in on your anti-gravity gun idea (especially of the
prototype works!!!)
6. Buying vs. Starting: There is a BIG difference between buying and starting a business.
Buying a business usually requires more “up-front” money and, you’d better really know what
it is you are buying. The key here is – DO YOUR HOMEWORK. To reduce the risk of
starting a business, do the following: (a) Have a product or service you can sell NOW; (b)
don’t skimp on the quality of your ADVISORS; (c) Set a BUDGET and stick to it; and (d)
only work with PEOPLE YOU LIKE AND TRUST.

7. Stick to what you know:
Some people look at starting their own business as a way of
“escaping” what they have done for years. That’s fine as long as your idea won’t require any
more capital than what you can raise on your own or from people who will invest in you.
However, if your idea is (a) going to require a ton of capital AND (b) it is in a field for which
you have ZERO experience, then you’d better have some major industry experts on your team.
Why? Because no one will invest in someone who is doing something completely outside their
field of expertise.

8. Don’t sell equity too soon:
The valuation of your company is the price someone would pay
for your business. Valuations tend to start low and rise slowly. The more significant
milestones you pass, the greater your valuation. Most businesses need a fair amount of cash
just to get started. Yet, if you ask others to invest that cash, most likely, they won’t be willing
to pay much for it. Thus, selling stock in your company too early will cost you more of what
is called “Dilution.” Dilution simply means that you have traded part of the ownership in your
company to gain much needed cash. The key is to not sell too much too soon. Try and pay for
as much of the early development as possible out of your own pocket since selling early will
cost you more dilution than selling later.
Another trick to getting the most out of selling equity in your company is to have a good sense
of what it is worth at any time. The best way to do that is to find a VC you can trust and have
them help you estimate a value. Contrary to what is taught in school, most companies are
valued on “comp” (comparison) basis much like it is done in real estate. Thus, the value of your company is often based on what similar companies in your market, at your stage in your
geography have gone for recently.

9. If it’s not FUN, don’t do it!:
Being an entrepreneur requires an enormous amount of
perseverance. Surviving the long hours, numerous rejections, financial hardships and eternal
uncertainty requires a strong vision, complete belief in yourself and your team and, above all,
you must enjoy what you do! If it’s not fun, you won’t survive.
10. Don’t spend money just because you have it: Watch an entrepreneur shortly after they just
raised a bunch of money and you’ll think they just won the lottery. Unless they have someone
to watch over them and control their spending, they will spend the money far too fast. On
average, it takes $30MM-$40MM to fund a company from an idea to the point where it can
either be sold or taken public. Thus, raising one chunk of capital only leads to having to raise
another. The trick is in making the money last through each cycle and in getting the maximum
bang for every buck. A savvy entrepreneur (and their team) will make sure that each
expenditure is carefully done against a plan and a budget PLUS they will always have a buffer
to hold them through the lean times (and there will always be at least one lean time in any
company’s life).

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This Rookie Mistake was sponsored and validated by Angel Strategies, LLC, an internationally
recognized angel capital firm. For more information on Angel Strategies, please go to their web site at
www.angelstrategies.com or contact Mr. John Garcia at 714-832-1102.
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Disclaimer
The information presented reflects the opinions of the sponsor and may not apply to every entrepreneur
equally in every situation. The reader assumes all responsibility for any actions taken as a result of
reading this material. The term “Rookie Mistake,” when applied to entrepreneurs, is a copyrighted mark
of The Venture Alliance.
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Contact Information
The Rookie Mistake program is brought to you by The Venture Alliance. For more information, please
contact us at support@tvausa.com or call us at 1-877-887-2020.

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