June 1, 2023


Moving Forward

The Seven Deadly Mistakes of Startups | by Michael Burnett | Mar, 2023

Any one of these will slowly kill your startup. Tackle these head on at the starting line.

AI generated oil painting of Otto von Bismarck with a fake tweet.
Midjourney’s interpretation of Otto von Bismarck.

There’s a Warren Buffetism about learning from the mistakes of others, and before him, Eleanor Roosevelt got a lot of retweets on the same topic. I’m going back even further to the late 1800s and the foreign minister of Prussia:

“Only a fool learns from his own mistakes. A wise man learns from the mistakes of others.”

— Otto von Bismarck.

OK, a bit harsh. Are you a fool to learn from your mistakes? No, of course not; that’s what we do every day. But there is something foolish about not learning from others’ mistakes when we have the opportunity to do so.

I’ve seen these deadly mistakes repeatedly and observed how they played out. The good news is they can be avoided with a little upfront work.

In short, do your homework.

There’s no such thing as certainty in startups. Unfortunately, this is often used as an excuse to skip the preparatory work that can mitigate (if not prevent) the serious risks ahead. The failures are errors of omission — prerequisites that startups don’t do or don’t do well enough.

Here’s the pre-launch checklist. In the sections below, we’ll see how their absence manifests as a catastrophe, but more importantly, how we can prevent that outcome and give ourselves a better shot at success.

These are roughly sequenced in the order you need to tackle them. Each one is progressively harder — you move up toward the boss level.

  1. Research, Three Ways
  2. Math Homework
  3. Marketing Strategy
  4. Offensive and Defensive Tactics
  5. System Architecture
  6. Operational Prioritization
  7. Brand Consistency

Let’s dive into them.

An AI generated Gothic-style oil painting of men working at a computer.
Gothic oil painting of men working at a computer, generated by Midjourney.

Fulfilling the above requirements is quick, cheap, and enlightening work. The output also prepares you whether you want to raise funding or bootstrap your startup. All of it can be accomplished pre-product and even pre-company-formation. Without it, here’s what happens:

1. A startup fails to find product-market fit

This perennial excuse is a euphemism for “no one wants what you built.” Advisors will kindly suggest that you return to the drawing board, validate concepts, and pivot.

The sunk costs fallacy makes this more difficult than it should be. Not only are there lost dollars and years, but there is also lost confidence.

There are three forms of research required you can do before starting up.

  • Discovery
  • Validation
  • Usability

Discovery research asks that you take a step back and put some social distancing between you and your product idea. You’ll need to get out of the building and talk to people. Don’t talk about your idea at all. Instead, seek to understand the problem space, as Indi Young advises.

Find out if others have the problem you think you’ll solve. Probe why and how it’s a problem for others. Find out what existing solutions or hacks people have. You can still pivot for free. In a best-case scenario, you emerge with momentum for your idea but new learnings to make it even better.

In the validation stage, you can start talking about Fight Club. Avoid the fear that drives you to secrecy and paranoia. No one will steal your idea; the more people you talk to, the better.

Subject matter experts can also give instant feedback on your idea and highlight what’s been tried. Competitive analysis can be as quick as a Bing and an hour exploring other products. Look for white space where you can differentiate.

Usability should not wait until you’ve built a product. Get Figma and UserTesting. You can use these tools at the validation stage, but you’ll need them to test usability. No design expertise is needed. There are high-quality UI kits and design systems available for free.

It doesn’t need to be pretty or even complete. (Usability testing takes on more significance with a product or feature release, but we’re still pre-launch here). You can make a clumsy hacked-together prototype at this stage and still get great insight.

Investors will want to see the results of this research; they’ll also want to see revenue estimates.

2. A startup struggles to earn enough profit margin

Demand might be huge and growth opportunities near limitless, but as a startup experiments with price sensitivity, they can’t squeeze a dime out of the equation.

Consider virtually every gig economy startup. Are consumers willing to pay for an hour of another human’s time to have their food delivered or their body delivered from point A to B? Every startup of every type must do the same sort of calculation.

I know you hate math, but look at it this way, math was made for money. If you want to be in business, do some math. It’s also a lifesaver.

With pencil and envelope in hand, do some rough calculations of your unit economics. This calculation will be drastically different depending on whether you’re dealing with physical or digital products, whether there are unit costs at all, and whether there is any human component to the unit economics.

How much does it cost to produce and deliver a unit, and what will you sell it for? What is your profit margin on it? In a recent post, I did a quick analysis of the scooter company Bird.

Still, making a profit on one unit is useless if you can’t scale that up into the thousands or millions.

3. It costs too much to acquire customers

DC Palter calls failed go-to-market strategies the leading cause of startup death. In my experience, this holds true: growth stage startups seem to have everything going for them… except it’s too hard to reach new customers.

CAC > ARPU is the deathly equation. Even a digital product, infinitely replicable with 100% margin, can still lose if it costs more to get the customer than the product earns. Selling is expensive, especially with salaried salespeople; SEM is often a money-losing effort.

You can estimate your Average Revenue Per User (ARPU) by taking your unit economics above and multiplying by the likely percentage of paying customers and their purchase frequency (sorry, more math). The profit margin on ARPU has to be less than the Customer Acquisition Cost (CAC) for your startup to be viable.

Putting a realistic number on CAC can be challenging, but you can test the waters. These will be different depending on your industry. Consider how you’ll reach customers and assess demand with potential partners and sales channels.

Inbound marketing is going to be your best friend. Start building your startup’s blog and social media presence. Find out what percentage of your followers will click on a call-to-action. Put money where your mouth is and see what it costs to expand your reach.

Try a “painted door” or pre-sales to see if your audience will commit to spending money. Aaron Dinin, PhD shares similar advice: 90% of startups get this wrong. GTM is more important than the product. A great product that can’t reach its target audience will be a flop.

Even a great product with effective GTM will need tactics to retain acquired users and protect market share.

4. A startup’s retention is low; customers leave to copycats

I promised above that people won’t steal your idea. While this is true at the idea stage, you’re fair game once you launch.

The market will be tuned in to see if you have PMF and traction — if there’s an opportunity to copy you and do it better or cheaper. To avoid this outcome, a startup must plan its offensive and defensive tactics.

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat”

— Sun Tzu

AI generated image of a Chinese watercolor painting of Sun Tzu surveying a landscape.
Midjourney’s interpretation of Sun Tzu.

Startups don’t have enough runway to take the slow route to victory. For offense, you need a beachhead feature.

This may not be the same thing as the great idea you validated. It has to help you get to that big idea, and it has to be an entry point for your market. It should solve a clear and present pain point for your intended audience.

Be wary of a shoddy “MVP,” you’ll need rapid adoption, not endless iteration. This beachhead must provide ongoing value and repeat use rather than a one-time transaction to retain customers.

Defensively you need moats. These fall into several categories. The network effects you build with your inbound marketing will also help your defense. Ditto trademarks and copyrights that help you build brand goodwill — it’s better than competing on cost.

Your most important intellectual property will be patents — it’s like a legally enforced monopoly. My favorite example is Amazon’s patent on a one-click checkout. Patents will be important for investors and your exit strategy; otherwise, copying you is a more attractive play.

Next, you’ll plan how to build a scalable machine from beachhead to mountain top.

5. A startup’s product is slow and buggy and gets overtaken

It doesn’t take long for new, faster technologies to emerge and relegate older codebases to “legacy.” Even the shiniest new language can be made clunky with inefficient architecture.

It’s the same with the front end; if a product can’t be navigated and used efficiently, customers will get frustrated and find a better alternative. Iterative releases also fall into the trap of failing to consider the big picture to build toward a fully-realized system.

In thinking about offensive tactics, we focused on the short term. Now we need to refocus on the long term and build something that can scale. Designing systems is a thorny subject, and it’s worthwhile to find advisors in the form of software architects and product architects (designers) to work through this.

Even for a simple Direct-to-Consumer product, you’ll need to consider your production supply chain, sales platform, and distribution. These choices will be difficult to unwind or migrate after they’re set up.

When it comes to software, there’s also a system within your product. Everything from your Object Oriented UX to your database architecture needs to be planned before anything is built so your product can work as well for 10,000,000 users as it does for 10.

Once you know what you’ll build, establish the principles of how and why you’ll build it.

6 & 7. A startup loses steam due to inconsistency with the team and brand

I group operational prioritization and brand consistency because, in my experience, they’re deeply intertwined. Operations is what you do inside the walls of your company; brand is what you do outside.

But it goes both ways — brand has to be nurtured within your culture; operational priorities have a huge impact on the brand, both inside and out.

VCs identify the management team as the biggest risk for startups. They have to set the tone for both brand and operations. They have to lead by example.

How well do employees know and believe in the meaning of the brand? The brand is not just for building culture. It’s also the guiding principle in decision-making. Operational priorities will define how and what you launch into the market.

Many startups default to faulty agile processes and release slipshod crap. The market responds by associating the brand with crap. Instead, consider how great brands operate.

With internal turnover, a culture changes (usually for the worse) if it doesn’t have guiding principles. A brand becomes worthless if principles don’t guide consistent delivery of value and meaning to the market.