One of the most rewarding aspects of financing technology entrepreneurs is that it provides an almost real-time window into the future. Having a front row seat to the innovations, ideas, and strategies created to solve seemingly intractable problems in new and surprising ways means that at Telstra Ventures, we have a unique view on what’s next. The other rewarding aspect is that in turn, we are in a position to shepherd great small companies toward becoming great large ones. Our team, with decades of experience as operators, marketers, channel developers, financial planners and strategists, works hard to bring this experience to bear on our portfolio companies, because it is every bit as valuable as capital itself when it comes to scaling.
Given how many roles entrepreneurs and founders must play to launch their businesses, it’s candidly not surprising that even as they manage the complexities of introducing completely new technologies to their target markets, there remains a set of slightly more pedestrian pitfalls that we encounter more often than not. Here, we’ll lay out what Telstra Ventures considers the biggest – and most-often repeated – mistakes entrepreneurs make, across three key categories: Funding, Culture, and Execution & Strategy.
FUNDING: KNOWING ALL OF WHAT, AND TO WHOM, YOU’RE PITCHING
Not only do entrepreneurs have to develop and sell their products, they have to be able to develop and sell their businesses if they are to attract capital to grow. There is no more exciting – or fraught – time for a company than when approaching investors.
Mistake #1: Target the Right Investor
While this sounds like a truism, we see a number of tactical and strategic errors when it comes to targeting. First, companies need to understand what investors are appropriate for their particular stage of development. There is a huge difference between investors looking for pre-seed and seed opportunities, vs. Series A and Series B rounds. Equally, there is a category of investors who are comfortable looking at pre-revenue or early revenue firms vs. those generating $100 million in revenue and looking to scale into a new phase of growth. Everyone can be saved time and disappointment with upfront due diligence in making basic targeting decisions.
Second, targeting the right investor also means being clear-headed about whether an investor is right for your business – after all, this is an entity who will have access to a tremendous amount of information about your products, your business and your customers. Being invited to pitch any one of the larger “brand name” venture capital firms is certainly exciting, but it is worth asking what their motives might be. Are they genuinely interested in your business? Or, it’s possible that your presentation represents a shortcut for these firms to collect market intelligence, possibly even at your expense, if they are contemplating backing a competitor.
Mistake #2: Remember You’re Pitching a Business, Not Just a Product
The team at Telstra Ventures has been collectively pitched thousands of times while in the business. One trap we see more often than not: entrepreneurs are so excited about their products, they forget that they need to actually sell the business model they plan to build around them. Too many times we’ve seen presentations fail to identify the actual problem the company proposes to solve for, or offer a set of clear, time-specific KPIs to illustrate current progress and future milestones. And while we understand the temptation, we often see presentations optimized for high valuation (vs. long-term, durable growth), creating a problem that anyone who reads the business section is familiar with: the future pain of unmet expectations, down-rounds and bad press. Understanding the natural scale of your business and hewing to it is sometimes hard to do, but has long-term benefits. Lastly, while it’s always tempting to sell to the partner in the room, do not underestimate investors with “Associate” or “Principal” titles – often, they can be your biggest advocates to get a deal done and are an invaluable channel for feedback and support.
CULTURE IS FOUNDATIONAL: SET IT EARLY
A company’s culture is foundational to everything it aspires to, because it guides behaviors in the absence of rules, which is especially important when a company is young and moving fast. We often analogize culture and concrete: not only is it the critical substrate upon which the enterprise is built, it also sets early, and thus is harder to change over time.
Mistake #1: Articulate Your Culture, and Hire Into it
The practical translation in terms of advice for entrepreneurs? It is critical, particularly as you prepare to scale, to have a clear view of your culture early on, and map key HR processes to it so that as you hire, you are bringing people onboard that not only meet a skills requirement, but represent a cultural fit. In small companies especially, bad hires early on can be devastating. We also see, and appreciate, the temptation for entrepreneurs to hire candidates they know vs. those who have the best skills for a particular role. If there is a strong culture, and you are hiring into it, we believe this can substantially diminish the risks of bringing new people onto your platform.
Mistake #2: Appreciate your Limits
A corollary to this: entrepreneurs have to be open to not running the company they founded, and be honest about their own strengths and weaknesses. A good business starts with a good idea, but a great business is built when founders find and retain people that complement their own skill sets, and trust them to do their jobs. Building a company is a team sport, not a solo job, and founders create downstream risks when they won’t (or, can’t) let go.
IMPORTANT M’s ON EXECUTION & STRATEGY: MISTAKES, MONEY, MARKETING & MANNERS
What happens behind closed doors is the greatest barometer for measuring the longevity or success of a business. This means being transparent about mistakes, smart decisions around money, cautiously avoiding the pitfalls of marketing and the manner with which you present yourself.
Mistake 1: Own Your Mistakes, Count Your Pennies and Understand Your Markets
Entrepreneurs often have a unique idea that can have a transformative effect on a market. They can also receive an overwhelming amount of advice on how to operationalize that idea, and so a key (and difficult) skill to master is being able to sift through the advice from boards, advisors, mentors, and independently make a decision for a given situation. And, sometimes, that decision will be wrong, which leads to a second key, and equally difficult skill: recognize a bad decision, own it and move on. Nothing blunts momentum (and morale) more than pressing on against the headwind of a bad decision. The corollary here is that as much as people don’t like bad news, they dislike being surprised by bad news even more. Be transparent when things aren’t going well, tell people who need to know early, and own the issue to resolve.
Another oft-repeated mistake, regardless of how much cash you actually have, is a failure to manage that cash wisely. When investing in growth and scaling, cash is king. Your investors will want to see the fruits of the cash downstream, and if you run out of it ahead of hitting key milestones, then cash can become a big problem. In particular, we understand the temptation to accelerate spending on your GTM strategy – after all, the market is where the customers are, and customers create revenue opportunities. But many entrepreneurs will rush to market, ahead of having a clear product market fit. To be consuming cash with a sales and marketing organization, without a well-defined channel strategy and sales plan, is a very difficult place to be.
Finally, the cost of in-house sales and marketing often creates an incentive to enter into distribution agreements, which on their face are a fine way for a small business to punch above its weight. We always tell our portfolio companies to only ever do “99%” exclusive agreements for a given market or (e.g. for a territory). We want our companies to retain the right to sell their own products, because sometimes, something as unexpected as a personality clash can halt a sale via a distributor, which could be overcome if the company sold directly.
Mistake 2: Waiting Until You’re Public to Behave Like You’re Public
In many ways, going public represents the apex of the entrepreneurial dream, and yet the practical reality is that being a public company brings not only a new and far more formal set of disclosure requirements, but invites significant scrutiny by multiple audiences: investors, regulators, analysts, journalists and, increasingly, the public (who, thanks to social media, can be every bit as influential as the hosts of CNBC). If you plan to be public, then behave that way – early. Formalize your own internal processes, in particular FP&A, and prepare and report your results at least a year before you go public. Equally, understand that from a planning perspective, you’re best served by de-linking strategic planning from financial planning, and further, developing a separate Wall Street Plan, Board Plan and Management Plan. Obviously, these cannot be contradictory, but there are risks in sharing stretch goals (or possible downside risks) publicly, because the ability to control how third parties interpret your messaging is limited. In addition, your business and strategy must be built for long-term success vs. preparing for a quick exit. While this may mean presenting a less aspirational portrait of your opportunity set, counterintuitively, faster public exits tend to come from longer-term, sober, planning.
Finally, and likely strange to hear from a fund that specialized in providing capital to growing businesses, entrepreneurs must remember that the best source of capital in the world isn’t a check from an investor: it’s the receipts from your own customers.
At Telstra Ventures, we’ve had a unique window into a number of pitches and companies, and have taken stock of what entrepreneurs can do to succeed, and oftentimes, what they do that invites a greater probability of failure. Every path is different, and while the VC landscape continues to evolve, these are tried and true patterns – and pivots – entrepreneurs can make to better guarantee their future.