17 Key Lessons for Entrepreneurs Starting a Business
Starting a new business can be a daunting task. There are myriad issues a new entrepreneur will encounter: legal issues, financing, marketing, product development, intellectual property, human resources—the list is endless. Many new entrepreneurs are simply overwhelmed by all the things they are expected to know.
Having been involved in hundreds of startups as an entrepreneur, lawyer, venture capital investor, angel investor, and Board member, I have learned a number of real-world lessons. In this article, I share 17 of the most important ones, along with references to other helpful articles that can offer you a more in-depth discussion of each topic.
1. Come Up With a Great Name for Your Business.
Finding the right name for your startup can have a significant impact on your success. The wrong name could result in insurmountable legal and business hurdles. Here are some quick tips for naming your startup:
- Avoid hard-to-spell names.
- Don’t pick a name that could be limiting as your business grows.
- Conduct a thorough Internet search on a proposed name.
- Get a “.com” domain name (as opposed to “.net” or another variant).
- Conduct a thorough trademark search.
- Make sure you and employees will be happy saying the name.
- Come up with five names you like, then test market the name with prospective employees, partners, investors as well as potential customers..
For more advice, see 12 Tips for Naming Your Startup Business.
2. Understand That Raising Financing Is Difficult.
Raising financing for your startup will likely be more difficult and more time consuming than you imagine. It takes a great deal of effort to convince angel investors or venture capitalists to invest in your company. So you need to anticipate the time delays involved.
Don’t waste your time trying to require prospective angel or venture capital investors to sign a Non-Disclosure Agreement (NDA) so that they won’t steal your idea. It’s counterproductive and will slow down your fundraising. And many investors will refuse anyway. It’s hard enough to get a meeting with an investor, so don’t put another hurdle in your way.
3. Focus on Building a Great Product—But Don’t Take Forever to Launch.
Your product or service has to be at least good, if not great, to start out with. It has to be differentiated in some meaningful and important way from your competitors’ offerings. All else follows from this principle. Don’t dawdle on getting your product out to the market, as early customer feedback is one of the best ways to help improve it. But you do want a minimally viable product to begin with.
4. Become a Strong Salesperson.
If your business is to become successful, you must become a great salesperson. You are going to have to “sell” your business not only to customers but also to prospective investors and even to potential employees.
You must practice. You must refine your pitch. You must get feedback. You must be extroverted. You need to show confidence. You must be positive. You must be trustworthy. You must follow-up. You must ask for the sale. You must listen.
5. Build a Great Website for Your Company.
You should devote time and effort to building a great company website. Prospective investors, customers, and partners are going to check out your site and you want to impress them with a professional product. Here are some tips for building a great company website:
- Check out competitor sites.
- Start by sketching out a template for your site.
- Come up with five or six sites you can point out to your Web developer to convey what you like.
- Be sure the site is search engine optimized (and thus more likely to show up early on search results).
- Have high-quality content.
- Make sure your site is mobile optimized.
- Make sure the site loads quickly.
- Create an optimized user experience.
- Keep it clean and simple; clutter will drive visitors away.
- Make sure you have a Terms of Use Agreement and Privacy Policy.
- Make the navigation bars prominent.
- Obtain and use a memorable “.com” domain name.
6. Perfect Your Elevator Pitch.
An “elevator” pitch is intended to be a concise, compelling introduction to your business. Your can modify your elevator pitch depending on whether you are pitching to prospective investors, customers, employees, or partners. Here are a few tips for coming up with a great elevator pitch:
- Start out strong.
- Be positive and enthusiastic in your delivery.
- Remember that practice makes perfect.
- Keep it to 60 seconds in length.
- Avoid using industry jargon.
- Convey why your business is unique.
- Pitch the problem you are solving.
- Invite participation or interruption by the listener—this shows they are interested and engaged.
7. Nail Your Executive Summary and Pitch Deck.
An executive summary typically is a 3-4 page high-level summary of your company that can be presented to potential investors. A pitch deck is a 15-20 page PowerPoint presentation that lays out more visually the business for prospective investors. You absolutely have to nail both documents. You must clearly articulate:
- Your mission
- The problem you are trying to solve
- The experience and passion of the management team
- The product and its key differentiating features
- The big market opportunity you see
- Your technology or proprietary innovation edge
- The competitive landscape and competitor shortcomings
- Believable projections showing a big upside in the business
- Examples of early buzz or customer traction
8. Understand Financial Statements and Budgets.
You must keep on top of your expenses and learn how to thoroughly understand financial statements and budgeting. Many startups have failed because the entrepreneur wasn’t able to adjust spending to avoid running out of cash. Establishing a detailed, month-by-month budget is important, and this budget must be regularly reviewed.
Understanding your financial statements will also help you answer questions from prospective investors. Here are some financial statement questions you can expect to get from investors:
- What are the company’s three-year projections?
- What are the key assumptions underlying your projections?
- How much equity and debt has the company raised; what is the capitalization structure?
- What future equity or debt financing will be necessary?
- How much of a stock option pool is being set aside for employees?
- When will the company get to profitability?
- How much burn will occur until the company gets to profitability?
- What are your unit economics?
- What are the factors that limit faster growth?
- What are the key metrics that the management team focuses on?
9. Keep Your Investors Constantly Informed With Both Good and Bad News.
It’s good practice to keep your investors updated on a monthly basis via email. The updates don’t need to be incredibly detailed, but here are some general items you want to consider including in your updates:
- Summary of the progress of the company
- Summary of product development
- Team and recruiting update
- Recent press or PR
- Key metrics you are paying attention to
- Financials, including monthly burn rate and current cash position
- Strategic issues you are facing (and ask for advice)
- Request for help by introduction to prospective investors, partners, and customers (you want to leverage their networks)
You want to maintain great relationships and connections with your investors. And you don’t want them to be surprised when you need to go back to them for additional financing.
10. Get All Employees and Consultants to Sign a Confidentiality & Invention Assignment Agreement.
To make sure employees and consultants keep the company’s proprietary information confidential, the company should typically require them to sign a Confidentiality and Invention Assignment Agreement. This form deals with the confidentiality issues, but also provides that the ideas, work product, and inventions that the employee or consultant creates which are related to the company business belong to the company and not to the employee or consultant.
Venture capitalists and other investors in startups expect to see that employees and consultants have signed such agreements. In an M&A transaction where the company is sold, the acquirer’s due diligence team will also be looking for these agreements.
11. Market Your Business Like Crazy.
To succeed in business, you need to continually be attracting, building, and even educating your target market. Make sure your marketing strategy includes the following:
- Learn the fundamentals of SEO (search engine optimization) so that people searching for your products and services might find you near the top of search results.
- Use social media to promote your business (LinkedIn, Facebook, Twitter, Pinterest, etc.).
- Engage in content marketing by writing guest articles for relevant websites.
- Issue press releases for any significant events.
- Network continually.
12. Use Consultants and Freelancers to Supplement Your Team.
At the early stages of your startup, you will likely want to have a small employee team to minimize expenses. A good way to fill in for specialized expertise is to use freelancers or consultants. That way, you avoid taking on employee costs and benefits payments. And there are a variety of sites that can help you access freelancers, such as Freelancer.com , Guru.com , and Upwork.com.
13. Make the Deal Clear With Co-Founders.
If you start your company with co-founders, you must agree early on about the details of your relationship. Not doing so can potentially cause enormous problems down the road (for example, see the Zuckerberg/Winklevoss Facebook litigation). In a way, think of the founder agreement as a form of “pre-nuptial agreement.” Here are the key deal terms your written founder agreement needs to address:
- Who gets what percentage of the company?
- Is the percentage ownership subject to vesting based on continued participation in the business?
- What are the roles and responsibilities of the founders?
- If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
- How much time commitment to the business is expected of each founder?
- What salaries (if any) are the founders entitled to? How can that be changed?
- How are key decisions and day-to-day decisions of the business to be made? (majority vote, unanimous vote, or certain decisions solely in the hands of the CEO?)
- Under what circumstances can a founder be removed as an employee of the business? (usually, this would be a Board decision)
- What assets or cash into the business does each founder contribute or invest?
- How will a sale of the business be decided?
- What happens if one founder isn’t living up to expectations under the founder agreement? How will it be resolved?
- What is the overall goal and vision for the business?
14. Get the Right Business Lawyer.
In a misguided effort to save on expenses, startup 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 large fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who could potentially help them avoid many serious legal problems. Founders should consider interviewing several lawyers or law firms and determine if the lawyers or the law firms have expertise in some, if not all, of the following legal areas:
- Corporation, commercial, and securities law
- Contract law
- Employment law
- Intellectual property laws
- Tax laws
- Franchise laws
- Venture capital and angel financings
It is not necessary that the lawyer or law firm has experience in all of these areas, because certain problems can be “farmed out” to different specialized lawyers or firms. But it is often best that you retain a firm that can handle some, if not many, of the areas of expertise listed above so as to provide continuity between you and your legal counsel.
There are a number of ways to locate competent legal counsel:
- Ask friends and business acquaintances for recommendations.
- Use state bar referral services.
- Conduct an online search (via a site such as Lawyers.com ).
- Ask for referrals from venture capital and angel investors.
See also: 10 Big Legal Mistakes Made by Startups
15. Take Into Account Important Tax Issues.
When starting a business, there are some key tax issues to consider. Here are some of the most common:
- Choice of legal entity. There may be valid reasons to choose a flow-through tax entity, such as an LLC or S corporation. Flow-through entities allow business losses to flow through to the shareholders to use on their individual tax return. But most venture capitalists and institutional investors prefer C corporations instead of flow-through entities.
- Sales tax. The company needs to collect sales tax on sales of its products, because failure to do so can have disastrous consequences. This issue is compounded if the company is selling in multiple states.
- Payroll tax. Many cities and counties impose a payroll tax.
- Section 83(b). Founders and employees need to consider whether they can mitigate potential tax issues by an IRC § 83(b) election. A Section 83(b) election relates to when someone receives stock or options subject to vesting and can minimize deemed taxable income to the recipient.
- Stock option issues. Companies often grant stock options to employees. If not done in compliance with IRS guidelines, such grants can result in adverse tax consequences to the company and/or employee.
- Qualified Business Stock. Holders of stock in qualified small business corporations may be entitled to a reduced rate of tax on gain from the sale of “qualified small business stock” under IRC § 1202.
- Tax Incentives. Depending on the nature of the business, various tax incentives may be available, such as renewable energy tax credits and investment tax credits.
A good accountant or tax lawyer familiar with these issues can be a valuable partner.
For a detailed tax guide for entrepreneurs, see Pay Attention to These 9 Essential Startup Tax Issues.
16. Do These Things Before Hiring an Employee.
Before hiring an employee, do the following:
- Make sure the employee has relevant experience for the job.
- Have several people within the company do an interview to make sure there will be a cultural fit.
- Be sure to check references and academic credentials.
- Make sure the employee signs a well-drafted employment “at will” letter (allowing you to terminate the employee for any reason).
- Make sure the employee signs a confidentiality and Inventions Assignment Agreement (see Confidentiality and Invention Assignment Agreements for Employees.)
17. Expect Big Challenges and Be Prepared for Them.
The biggest challenges to starting and growing a business include:
- Coming up with a great product or service
- Having a strong plan and vision for the business
- Not having sufficient capital and cash flow
- Finding great employees
- Firing bad employees quickly in a way that doesn’t result in legal liability
- Working more that you expected
- Not getting discouraged by rejections from customers
- Managing your time efficiently
- Maintaining a reasonable work/life balance
- Knowing when to pivot your strategy
- Maintaining the stamina to keep going even when it’s tough
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Copyright © by Richard D. Harroch. All Rights Reserved
Richard D. Harroch is a Managing Director and Global Head of M&A at VantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on investing in Internet and digital media companies, and he was the founder of several Internet companies. His articles have appeared online in Forbes, Fortune, MSN, Yahoo, FoxBusiness, and AllBusiness.com. Richard is the author of several books on startups and entrepreneurship as well as the co-author of Poker for Dummies and a Wall Street Journal-bestselling book on small business. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital. Richard can be reached through LinkedIn.
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