We must recognize that no one adequately prepares us to be entrepreneurs. This path is more an art than a science, and we learn primarily through experience. Although there are entrepreneurship schools, the wide range of issues that must be managed and the dynamic nature of the entrepreneurial ecosystem make it difficult to master the game, even with good training.
However, there are certain principles shared by experienced managers and investors that, if we manage to incorporate into our conscious practice, will allow us to save time and effort. These resources are valuable for day-to-day business and can significantly increase our chances of success.
- Focus on solving irrelevant problems. Many entrepreneurs spend time and resources solving problems that are not really significant problems (either because no one considers them a real problem or because there are only small niches of potential customers), using basic technology and facing few barriers to entry and competition.
Before starting out, our suggestion is to spend a lot of time analyzing potential customers and their real problems.
One of the best reads in this regard are the articles written by Clayton Christensen and Tony Ulwick about the concept of “Job to be Done”. And one of the best books we can find on this subject is “What Customers Want”, by Tony Ulwick. It is crucial to identify real problems that affect a large group of people and that can be solved in an innovative way.
- Focus on business models with low gross margin. Those businesses with a gross margin of less than 30% would already be considered insufficient. Opting for business models with low gross margins can limit the possibilities for long-term growth and sustainability. It's vital to find a balance between an attractive product and a cost structure that allows for healthy profitability.
- Develop capabilities before achieving product-market fit. Investing in capacity and expansion before confirming that the product meets market needs involves very high risks and great chances of failure.
This is the main mistake that causes many entrepreneurs to end up in the well-known “death valley”, where resources run out right after finding the right product, but before they can prove that we have found it. In this way, the entrepreneurial team has squandered the money of investors who have believed in them and have lost the ability to convince new investors because they have not been able to generate sufficient evidence that they have developed the product that potential customers are willing to buy.
It is preferable at the beginning to invest as few resources as possible in the exclusive development of a successful MVP., even at the cost of not being able to serve the market in a timely manner. Those are the real problems an entrepreneur wants to have!
- Poorly structuring the entrepreneurial team. A successful team needs at least two key figures: a product development specialist (brilliant technologist), like Steve Wozniak at Apple, but also a good sales person, like Steve Jobs, able to understand and communicate to the product development team the real needs of the potential customer.
Without these two key figures, along with communication skills (for Spanish entrepreneurs this means speaking fluent English) and leadership (to attract the best talent), the team will have a much harder time thriving.
- Obsessed with getting very high ratings in the beginning. Focusing excessively on achieving high valuations in the initial stages of a startup is equivalent to putting the cart before the horse... and can cause unnecessary discussions and a waste of scarce and valuable time for entrepreneurs. As entrepreneurs generally navigate waves of trends generated by technological advances, time, and not the valuation of the startup, is the most valuable resource they must focus on. If the business is good, there will always be opportunities to reap value in the company. Either through stock options, or through the multiplication of the company's value.
- Mismanaging the capital structure. In Europe, where valuations tend to be lower than in the United States, it's crucial to think strategically about the capital structure and take advantage of debt when necessary. Failure to do so may limit growth and negatively affect the company's valuation.
Capturing as much debt as possible after obtaining initial investment is vital. Although some VCs argue that debt can sink startups, the real cause of failure is the lack of rapid growth. Before achieving the product-market fit, it is essential to conserve resources and extend the runway. However, once achieved, the goal is to grow quickly. High growth reduces debt as a percentage of P&L or balance sheet and attracts more private capital, increasing the capacity to obtain more debt.
- Being confused when talking to investors. Starting a pitch talking about anything other than what the company does (purpose) and extending to irrelevant issues across a deck of more than 20 pages can result in countless hours wasted talking to investors without achieving any results.
The “Pitch deck” theme deserves an entire article in itself, but as a simple rule we can adhere to limiting it to 10 slides: purpose, problem, solution and technology, traction and metrics, market size, competition, business model, go-to-market, team and financial projections + ask.
- Run in an amateur way. The lack of focus on sales, the inability to attract top-tier talent, the underestimation of multitasking in the early stages, and the inappropriate delegation of key tasks are signs of amateur execution.
Entrepreneurs must be willing to do what is necessary to ensure success from the start and understand that launching a startup is not for everyone, that you have to work very hard, that you have to fight against one and a thousand problems all the time, that more than once will be on the brink of the abyss, and that, in many moments, they will feel like the most alone and misunderstood people on the planet.
- Being unrealistic about the added value of investors. Overestimating what investors can provide, beyond capital, can lead to unmet expectations. It is important to objectively evaluate what added value they can offer and to establish a relationship based on clear realities and mutual benefits.
Usually, and unless we're talking about some of the biggest VCs in the world, we can expect investors to help us with their network of contacts. Beyond that, as I said before, only the most powerful VCs have sufficient means to help with tasks such as recruiting talent, accessing international markets, and providing strategic support at crucial stages of growth. Therefore, it's essential to have realistic expectations and focus on what they can actually offer.
- Settle for selling the company to a competitor. To conclude this article on the most frequent mistakes that entrepreneurs make, we are going to talk about one of the issues that most concern us because of the repercussions it has on our continent and on the future of those who succeed us: The lack of ambition.
Many European entrepreneurs see selling to a competitor as the ultimate goal and do not aim to build companies capable of leading markets at an international level. This is one of several reasons why the United States is responsible for the fact that 14 of the 20 technology companies are from there, four (TSMC, Tencent, Samsung and Alibaba) are Asian, and only two are European (SAP and ASML). And this is true because of the recent stock market appreciation of chip companies... otherwise the picture would look worse for Europe and Asia.
In Europe, over the past few years, the average technological startup has sold for 40 million euros (and in particular in 2023 this figure has dropped to 23 million euros). Obviously, European entrepreneurs need a more ambitious vision if the continent is to reposition itself towards the future and compete on a global scale and not become the world's museum.
