The problems you are ignoring, unaware of, or simply dismissing, that might kill your startup.
Startup are hard, that is not a secret. There are many risks that startup founders are aware of — funding running out, clients not paying, employees retention issues are just examples of common known problems. But there are also several hidden problems that founders, and new early stage investors are unaware of (or do not pay attention to) that could very easily kill your startup. These hidden issues are hidden because they do not seem like a problems at first, until it is usually too late to solve them — startup with these issues are walking dead.
Well, pleasant opening — Here they are the Silent But Deadly Startup Problems:
- Broken cap table — a cap table is a list of company owners and their holdings in the company. For example, if you are a sole founder and you have not given away any stock the cap table has a single line with your name and 100% of the company. Broken cap table have many variations but the most common I have seen are ones were founders gave away too much of the company for too little money. I recently met a founder that gave 30% of his company for $500K, he did not even know that was a problem. The problem with a broken cap table is that it is very hard to raise funds in following rounds, you might be able to fix a broken cap table, but it is extremely hard. While we are on this topic, also learn about “Dead equity” as a common cause for cap table issues.
- Enterprise bear hug — You got a big client, Yaay! Usually big clients are amazing and great news for startups. But I have seen companies die because they did not establish the right relationship with the big company. I have seen founders sign exclusivity deals with big companies that prevent them from selling to other companies. I have seen founders give away intellectual property to big companies as part of a deal. I have seen founders commit extreme resources that suffocate any other development in the company for the sake of a big customer. All these mistakes can kill your company, while you are celebrating that fat check from that customer.
- Non-scalable product market fit — you have 3 clients that love your product , Yaay! but ask yourself, how many other clients like them are there? One of my startup was solving a big problem for a very small set of customers. We did not know the product was a dead-end, and we were celebrating our product market fit. Always try to calculate the total addressable market of your product market fit, before opening the Champagne — pivoting after you have active paying customers is extremely hard to do.
- Toxic investors and nonstandard legal documents. You just raised a million dollars, Yaay! But is your investor on your side or on the opposite side? I have seen founders that sign draconian documents that give investors catastrophic rights over the company. I have seen investors that ask for a % of the revenue, I have seen investors that have absolute power in the board, I have seen investors (gov ones) that mandate that the IP is developed and kept in a certain location. I have also known investors who are totally toxic to founders and other investors. I usually love everyone, but there are 1–2 investors I will never invest with as they are super toxic.
- Rotten relationship between founders — I use rotten to notate unresolvable issues between founders. This can be the inability to trust each other, or the inability to resolve conflicts in a productive way. Sometimes this can be mitigated with a good executive coach — but often these challenges drive a company to the ground, and by the time to call in the coach there is nothing to save.
These are not the only reasons that a startup might fail. I don’t even think these are the most common ones. But these are the sneaky ones, the ones that savvy investors look for when doing Due Diligence, and that founders should be on the lookout to avoid like the silent killers they are.