5 Over-arching Mistakes That Can Sink Your Startup in the Long Run

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Jul 28, 2016

A casual glance at my LinkedIn profile will help anyone conclude that I am an unlikely writer for this post-I have never been an entrepreneur, let alone be an astute one. That said, the experience I have garnered throughout my ~8-year-long career that has been entirely spent in early stage companies, my interaction with a number of entrepreneurs in different capacities, including roles as Investment Banker, Financier, Adviser and my lackluster stint in a start-up company board; all of these factors combined have equipped me with insights to spot the subtle actions that may not define a smart entrepreneur.

Since throughout my career I have worked in Asia, what I am about to expound on might appeal/apply to Asian readers most. Below is a non-exhaustive list of entrepreneurial actions that I consider not-so-savvy:

1. Spending on Personal Luxury:
I have experienced this phenomenon quite often among first-time entrepreneurs who were extremely successful in their previous jobs and bring in the legacy of enjoying perquisites they were privileged with at their own ventures. Granted that their years of efforts, planning and risk taking deservedly justify that they earmark enough space for a magnificent personal room, get best gadgets and buy/lease a luxurious cars- however- capital expenditure decisions are extremely crucial and thus caution should be exercised in spending on such items since there is little/no scope to undo a mistake committed herein later on in a cost effective manner.

A visionary entrepreneur knows that his/her eventual success may enable to enjoy much better luxury down the line. Thus a patient and savvy entrepreneur-for example-may provision extra space to accommodate staff for future expansion, keep aside money for rainy days and remain trigger shy re: expenditure items that bottom the list of priorities.

2. Taking Over-expeditious Capital Expenditure Decisions:
As explained earlier, capital expenditures are essentially sunk costs. Thus committing too much too early without gauging demands/utilization or leaving less-than-prescribed room for working capital financing can prove debilitating or even fatal. That is particularly true for healthcare, hotel and similar businesses where the initial business plan may take considerable time for gestation/fruition.

3. Rigid Staffing Strategy:
In the beginning, it is crucial that you maintain a lean team; employing part-time workers who you have the flexibility to convert to full-time staff upon successful orientation/graduation can prove extremely value enhancing. Most entrepreneurs take a big bang approach and go gung-ho on hiring staff-similar to creating overcapacity situation.

4. Inability to Strike Valuable Strategic Partnership:
This obviously sounds a no brainer. However, let me provide an example to hit home the message I intend to deliver. I have invested in a couple of animal food manufacturing companies and detected a curious trend in the industry. Most of these firms have underutilized production capacity because of offering a large number of distinct products.

Given that production of aquaculture and livestock requires consumption of different types of feed across species and within the lifespan of a certain species, these producers have to maintain matching product lines due to the fear of losing business on account of the inability to deliver a particular type of feed.

Nevertheless, these entrepreneurs find it impossible to either strike meaningful bargain/accord with competitors, and/or focus/specialize on a particular feed type without having a situation where everyone produces everything. Hence all of their plants feature sub-par capacity utilization , as the production process experiences frequent disruptions over switching into different products.

5. Failure to Develop Relationship with and Dependency on External Professionals:
It is utmost important for a startup entrepreneur to develop important allies early on in banks, audit farms, law firms and other significant places. They must develop an eye to be able to spot future stars in these spaces and invest in forging a long-term relationship with them. As the entrepreneur's contacts in these industries grow, s/he is able to reap hefty relationship dividends.

The inability to develop such relationship will, more often than not, lead to the commission of costly mistakes; unless the entrepreneur is able to hire a team of extremely competent professional whose efforts are well complemented by his/her own initiatives and voracious appetite to learn.

This list will certainly evolve as I mature as an investment professional. However, I do hope that you could figure out some important takeaways from the discussion above.

Note: This article originally appeared on Linkedin, republished with permission.


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