Common Mistakes Made By Startups
India today is undergoing the start up era, with so many start ups getting huge impetus, customer base and enormous amount of funding from investors. While the spotlight remains on the increasing number of entrepreneurs that give wings to their ideas every day, but a large number of them also go bust quickly. We have in this write up tried to list few common mistakes made by start ups:
1. Skimping on the business plan.
Having a properly chalked out business plan plays a vital role in determining future success. Before foraying into the start-up eco system, we need to be clear on the following aspects:
a) What is the purpose of the business?
b) Who are the potential customers?
c) What are the mission and values?
d) Who are the business's competitors and what are they doing?
2. Inability to assess right amount of funds required by business.
How much money to raise? The flippantly short version to the answer is ‘as much as you can.’Although you should raise as much money as your business needs to achieve major proof-points/milestones, overfunding the business can also have its drawbacks. With more money usually comesmore investment terms and more of due diligence, further higher amount of investment also calls for higher valuation and setting up unrealistic milestones and returns for the business to achieve.
When to raise funds? The best time to go fund raising, is RIGHT BEFORE or SHORTLY AFTERthe successful completion of a key or series of key milestones. For example, right before a key milestone, you can woo new investors with the promise of how successful you will be at the completion of the milestone and basically you convince them that if they don’t get into your business by investing now, they won’t have a chance after you’ve achieved the milestone because many others will also be interested and the competition will be stiff (remember, investors don’t want to lose out on potentially hot deals). Shortly after achieving a key milestone is also a good time to try and convince investors because you’ve effectively accomplished a major thing (like launching a product), which de-risks the investment for them, but they can still get in the business before it ‘takes off’. Frankly, the worst time to go fundraising is when your last major milestone has grown stale and the next one is too far away to be de-risked. So, this is why it is key to know your milestones, and when they are happening.
3. Too many investors
“VC’s are like martinis: the first is good, the second one great, and the third is a headache.’The start-ups thrive in a very dynamic world and the decisions need to be taken at a very fast pace. Normally having too many investors on Board, would imply a larger amount of time spend in getting approvals of the investors, making the diverse investors agree on decisions, removing attrition and completing the paper work.
Founders should understand that a business can have an ‘n’amount of investment coming from ten different people or just two people. Having too many investors on Board often disturbs the stability of the business.
4. Informal investment (initial investors)
As most of the start-ups are initially funded by friends, family and on goers, it is really important that the terms of such investments are formalised, as these initial investors have funded your idea, when nobody believed in your merit. If the terms ofservicing such investments are not decided at the time of taking such funds, then one should ensure that the same is done at the time of getting the first formal investment. Most of the time such funds keep on lying in the books of the business as unsecured loans, share application money and at times the same is even not recorded in the books of the business. Therefore, it is imperative that issues like the terms of redemption or conversion into equity and the frequency of such redemption or conversion are decided forthwith. Because, anyways such amounts keep on lying in the books as liability and can shy the formal investors from investing.
5. Confusion amongst co-founders
One of the very common factors for the breakdown of start-up is ‘Too many people, who are very similar to each other’.Often the start-ups are started by colleagues and friends who are not very clear about the whole picture of business and inter se roles and responsibilities, which often leads into discord and disagreements (for example, the Zuckerberg/Winklevoss Facebook litigation). Here are the key deal terms you need to address in some kind of written agreement:
a) Who gets what percentage of the business?
b) Is the percentage ownership subject to vesting based on continued participation in the business?
c) What are the roles and responsibilities of the founders?
d) If one founder leaves, does the business or the other founder have the right to buy back that founder’s shares? At what price?
e) How much time of commitment to the business is expected of each founder?
f) What salaries (if any), are the founders entitled to? How can it be changed?
g) How are the key decisions and day-to-day operations of the business to be made?
h) What amount of assets or cash does each founder contribute or investinto the business?
i) How will a sale of the business be decided?
j) How can more investors be brought on the Board?
k) Can the founders continue any competitive business?
6. Not protecting intellectual property (IP)
If you have developed a unique product, technology, or service, you need to consider the appropriate steps to protect the intellectual property. Both the business’s founders and its investors have a stake in ensuring that the business protects its intellectual property and avoids infringing the intellectual property rights of third parties. Protecting that particular aspect is core to the business. But we often fail to do that and spend time in developing the asset. So there is quite a possibility that on the day of getting the investment we end up realising that some other individual has got our product registered in his or her own name and we are no longer the owner of our asset.
7. Skimping On Quality Advisors
How much do you know about law as start-up firm or how much budget you apportion on hiring quality legal advice, accountantsto get the right adviceare important areas where the promoters should devote their time. The promoters are not expected to look into the day to day compliances of the business, but they should be cognizant about the importance of these factors in the overall working of the business. In a misguided effort to save on expenses, start-up businesses often hire inexperienced legal counsel. Rather than spending the money necessary to hire competent legal counsel, founders will often hire lawyers who are friends, relatives or others who offer steep fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who can help the founders avoid many legal problems.
There are no shortcuts to success: it takes rigorous planning, a good team with a balance of technical expertise and market knowledge, a product that truly promises a differentiator, and the right partners.
About the Authors:
Sameer Mittal (Founder – Finfit)
Sameer is a qualified CA – An all India Rank Holder in CA Final (amongst the top 50 in the country). Sameer has over 10 years of experience in assurance and auditing services across wide range of sectors and industries. Sameer has previously worked with Deloitte and with Altran control solutions (Now Protiviti).
Sameer is responsible for detailed understanding of the clients, their business processes, knowledge of the technical requirements under the Indian/US GAAP and liaising/resolving audit issues with the clients. Sameer has experience in developing and rolling out the Standard Operating Procedures and Process Manuals for virtually all the key business processes including Plant Operations/Manufacturing, Procurement, Inventory, Finance and Accounts, Revenue and Human Resources.
Sameer has authored a book on ‘’Risk based Internal audit plan’’ published by ICAI in February 2015.
Sameer has served as the faculty for the Information Systems Control and Audit on the board of ICAI for 3 consecutive years and has also been a Speaker on different forums of ICAI and International forums, clocking close to about 45 hours every year, speaking on Corporate Governance, Corporate frauds, Internal Audits at different forums across the country and abroad.
Sakshi Agarwal (Founder – Finfit)
Sakshi Agarwal is a qualified company secretary and a qualified Lawyer. She has an experience of more than 7 years in catering the needs of various kinds of entities such as Companies, LLP’s, Partnership Firms etc. in complying with various laws applicable and other services which are necessary for the overall governance of an entity, including the services to existing entities and for setting up of the new business.
Sakshi play a keen role in managing the compliance audits, legal due diligence and review of the area of the statutory compliances. Sakshi holds the credit of drafting couple of Statutory compliance manuals for the big corporate houses.
