Our Founding Partner Prof. Dr. Bastian Halecker invited investor Florian Heinemann from Project A to the second round of “Meet & Greet Entrepreneurship” on April 24, 2019 on the campus of the Beuth University of Applied Sciences. They discussed “10 mistakes (potential) founders should avoid” if they want to start up successfully.
Because Heinemann’s identified mistakes are evidently also relevant for food and food technology startups, we would like to present them here in a summarised form.
MISTAKE #1: DON'T SPILL, SPLURGE!
“If you plan mediocrely, you run a high risk of ending up small,” says Heinemann. Successful founders manage to convey the big picture to partners and employees. Inspired and motivated by this, they can reach their full potential. In addition, investors are more likely to be convinced this way.
MISTAKE #2: THE PRODUCT IS NOT IN THE CENTER OF FOCUS
Positive UX is extremely important. After all, an excellent product is at the core of any company that enjoys sustained success. Consequently, marketing can only be a catalyst. The best marketing will not be able to compensate for a bad product. Since founders in Germany usually have too little “love for the product”, it is already a unique selling proposition if you fully stand behind your own product.
MISTAKE #3: LACKING TECH AND DATA COMPETENCE
The economy is becoming increasingly digitized. Accordingly, the corresponding tech competence gains importance. If you want to survive in the long term, you have to build up a solid IT architecture right from the start. Those wanting to save time at the beginning, run the risk of having to correct the upcoming errors later. In retrospect, however, these take up a significant additional amount of resources (time, money, manpower, etc.). Ultimately, data competence will prove to be THE differentiating factor in the future.
ERROR #4: MAKING THE FINANCING ROUNDS TOO SMALL
As a rule of thumb, a company has to survive with the capital of a financing round for 15-18 months. In return, a financing round leads to 20-25% of the company’s shares being sold. For many founders, less financing means being able to keep a larger share of the pie. In the contrary, often a higher amount of financing makes it more likely to increase your own profits. It is important to keep in mind that the negotiating position can change with each financing round.
MISTAKE #5: CHOOSING THE RIGHT FINANCING PARTNERS
It usually makes a bad impression if you get too many financing partners on board. More partners lead to less decision-making power of the founders. One should also limit the number of financing partners who are not able to take on follow-up financing later on in the process, referred to as “dead equity”. Moreover, one must be aware of the “signaling” that a closed partnership means. Regardless of the capital that the partner brings into the business, one is associated with both the current and past financing partners. The partners’ reputation functions as a competitive driver. Choosing investors should be well-considered, as business developments are subject to path dependency. Once a path has been chosen, it is difficult or impossible to change.
ERROR #6: CREATING A CAP TABLE WITH A NEGATIVE SIGNALLING EFFECT
Regardless of the performance of your company, the capital structure you have built up can stand in the way of further development. It is best to adjust your approach to your medium and long-term goals, making it easier to secure attractive follow-up investments. Mistakes often result in the interaction between inexperienced investors and first-time founders who think too in the short-term. Negative signaling effect: e.g. a startup in an early stage has 4 dentists as investors, who together hold 50% of the shares among the shareholders. Positive signaling effect: e.g. a well-known business angel with a 20% participation that can convince larger VC’s of the idea and potential at an early stage.
MISTAKE #7: UNDERESTIMATING THE POWER OF STORYTELLING
Nothing can convince people as much as picking them up emotionally. Providing them with the opportunity to personally identify themselves with a problem has a potential that is often underestimated. And that is exactly what storytelling is capable of. It can act as a key competitive driver in financing rounds and also in recruiting sessions. Perception determines reality and reality follows a vision, hence it is particularly important to influence perception.
MISTAKE #8: EMPLOYING "BAD" PERSONNEL IN THE SECOND RECRUITING ROUND
The principle should always be “capability beats affordability”. The focus on recruiting should be on the capabilities of a candidate. So-called “A-players” pay off in the long run and should definitely be kept in the company. This is another reason why the right financing is of major importance. It is worth thinking about recruiting personnel that is overqualified for the work at hand, but will fully pay off at a later stage. Having the ultimate company vision, the founder(s) should do the recruiting in order to align the personnel selection with the long-term goals.
MISTAKE #9: POOR OR LATE DEVELOPMENT OF INFRASTRUCTURE AND SYSTEMS
A well founded infrastructure and a sorted data warehouse, which archives data neatly and available on demand, can save plenty of resources. In addition, the data will become an increasingly relevant success factor in the future. If there are problems in this area, these can become obstacles to growth. Yet again, the importance of sufficient financing becomes evident.
MISTAKE #10: NOT ESTABLISHING THE RIGHT DECISION-MAKING AND CORPORATE STRUCTURE
If you build up a data-driven, decentralized and content-focused structure that has tolerance for errors and acts pragmatically, you are on the safe side. This is because it allows you to achieve a high quality of decision-making, resulting in positive further development. Measurable performance makes hierarchically driven decisions obsolete. Consequently, the danger of creating a politically motivated culture that does not focus content is minimized. In addition, this can have the positive side effect of gaining productivity, as every employee can influence the quality of decisions.
Many thanks to Florian Heinemann for sharing his expertise in this inspiring lecture! We would also like to thank the Beuth Hochschule für Technik Berlin for hosting the “Meet & Greet Entrepreneurship #2” on its campus.