Post-seed Round Startup Pitfalls

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Podcast: The 5 Things That Kill Startups After Their Seed Rounds and How to Avoid them with Michael Seibel, CEO @ Y Combinator.

Notes

1: Fake product market fit

One of the most common symptoms of impending death for post-seed companies.

Why do founders believe they have PMF when they don't?

Causes

  • They raised money from popular investors.
  • Raising a Series A pre-PMF: instead of focusing on users & products, founders focus on company building.
  • Magical thinking: ignoring obvious facts in front of you that gives you the evidence you don't have PMF. For example, not understanding your churn or not understanding your payback period when you acquire a customer
  • Lack of strong technical talent: can't improve their product well enough

PMF feels like "your product is breaking with profitable usage":

  • "Products is breaking" - Parts of your product that you didn't built to scale are breaking -these could be technical/software or people/operational
  • "Profitable usage" - the users are the type you want and the type of economics you want. You don't have too long of a payback period, and users don't cost you too much.

Signs

  • Lots of hiring (team goes from 4 to 12).
  • More business people than engineers.
  • No metrics dashboards. People are doing things by feel/guess.
  • Too many nice things (offices, trips, dinners).
  • Flat graphs.
  • Missing your estimates but coming up with reasons why it's ok.
  • Changing your KPIs.

Preventative Measures

  • Pick an honest KPI and stick with it: revenue.
  • Track retention carefully.
  • Cap your burn. Determine how much $ you're willing to spend every month and stick with it.
  • Consider raising less $ in your seed round.
  • Start with strong technical co-founders.
  • Have a 3 month essential rule when hiring. If the person you hired after 3 months is not essential, you probably should let them go.
  • Force revenue-generating employees to pay for themselves.
  • Learn about the bad investments your investors have made.

2: Turning your investor into your boss and doing what they tell you to do

Causes

  • Fear and self-doubt. Every founder has this. Process it, but don't use it to look for your investors to tell you what to do.
  • False assumption that there are 100% repeatable paths to victory. Just because the investor has done it before doesn't mean they can do it again with you.
  • Lack of talking to customers. When you stop doing this, you stop getting insights about what's wrong and what's right.

Signs

  • You're feeling pressure to spend more money than you want to.
  • You're hiring faster than you thought you should or planned for.
  • You're burning more $ every month, but your primary KPI is not increasing.
  • You've locked into one investor and closed communication with others.
  • You feel that if you follow the plan the investor gave you, they'll backstop you if things don't work out.

Preventative Measures

  • Continue to talk to your customers.
  • Have a real KPI, have real metrics.
  • Track retention.
  • Keep a low burn.
  • Do a startup in a space where you have organic insights in.
  • Know that you're the one giving investors power over you if you do what they say.

3: Co-founder conflict

Causes

  • Not a strong prior relationship.
  • No clear roles and responsibilities.
  • Lack of trust.
  • Unrealistic expectations. Comparing yourself to others.

Signs

  • Lots of fighting.
  • No conversation.

Preventative Measures

  • "Level 3" conversation: having a tough convo about how you feel in a safe space (not during drama).
  • Explicit roles & responsibilities conversation.

4: Ordinary or extraordinary

Are you copying the people around you but expecting a massive success?

Causes

  • Understand that the people around you are the floor, not the ceiling.
  • Not believing (confidence) that they can be better than the people around them.

Signs

  • No numerical goals. Measuring success other ways.
  • Ignoring obvious signs of lack of progress (not growing month over month, for instance)
  • You're just happy to be alive. Happy to have $ in the bank.
  • You've stopped learning.
  • Blaming outside factors or a lack of "luck" for a lack of success.

Preventative Measures

  • Embrace the idea that you can get better over time, if you try.
  • Habit formation. "Atomic Habits" is a good read for this.
  • Have a Jedi council. A group of people you get advice from that are more extraordinary than you.
  • Set measurable goals. Set the bar high. Challenge yourself to accomplish a goal in the business that you don't know if you can achieve.

5: Slow product development

The ability to get features, fixes, etc out the door gets slower and slower.

Causes

  • You have no process for deciding what to build.
  • You don't run sprints. You don't have deadlines.
  • You don't write specs. You have conversations and build what you talk about.
  • Your engineers are not involved in product decisions. The people doing the work aren't involved in the discussion of what should be built.
  • No metrics. You can't tell whether your product is "working" because you're not measuring anything.
  • You stopped talking to customers.
  • Bad co-founder relationship.
  • Low quality product founders. People who believe they know what the customer wants without ever talking to them.
  • Low quality technical founders. Your technical founders are not strong enough to produce product at high enough quality quickly.

Signs

  • Deadlines are always missed, or there are no deadlines.
  • Your release schedule is quarterly or longer.
  • A discouraged or disengaged engineering team.
  • Half-done features piling up.

Preventative Measures

  • Have a product development cycle. Have a process to take as many shots on goal as possible.
  • Always be collecting qualitative and quantitative feedback. Have an analytics product and always be doing user interviews.
  • Write specs. A product meeting is not done until there's a written spec.
  • Use product management software.
  • Give all team members access to the customer and customer data. It shouldn't be just the product person.
  • Understand that motivation is a multiplier on talent.
  • Whomever leads product is responsible for making sure product is released (not deciding what to build). When we say we're going to build something, we set a deadline and we hit it.