While this factor absolutely haunts most startups, it also affects even established companies.  It normally doesn’t kill a big company, however, which is I why I’ll focus on the startup.

In short, popular wisdom in the world of the tech startup dictates a cadence and pattern for a company to follow that is 100% ass-backwards – thus almost single handedly assuring either ultimate failure, or forcing a “re-start” that inevitably will cost the company significant time and money.

These are the acceptable stages of business as we know it:

1. Develop an idea.
2. Sell the idea to a VC/Angel.
3. Develop the product.
4. Ask some people along the way what they think about the idea/product.
5. Change the development schedule/priorities based on answers or non-answers to 4.
6. Change the development schedule/priorities based on shit being much harder in certain areas then you expected.
7. Hire your sales god.
8. Send out a press release telling the world much too much about much too little.
9. Line up the beta sites.  Actually believe that because you got 4 sweet betas, you are really ready to rock & roll.
10. Set moronic expectations with the board.
11. Do a half-assed launch, normally too early, with no benefit except to inform the competition of what your plan is.
12. Figure out that 75% of what you put into the product is entirely wrong.  Ignore that fact and try to force the market to “see things your way.”
13. Re-work product again.
14. Get revenue.  Sell, sell, sell.
15. Set even more asinine expectations with the board.
16. Find new VP of Engineering after firing the first for being 9 months late with a product no one wants because no one bothered to ask, and for adding new features/priorities every other day.
17. Find new VP of sales because they didn’t sell anything.
18. Completely ignore any actual marketing whatsoever.
19. Do a “B” round at a crappy valuation.
20. Find or fabricate data to support your product (but ignore data that actually looks for a problem/market opportunity).  Insist that this is a justification for your being.  Don’t bother with data that tells you otherwise.
21. Find new CEO.
22. New CEO has 6 months of grace where all blame can be tossed backwards.
23. Awful VP of Marketing is left intact because CEO doesn’t know anything about marketing other than its only job is lead generation, and hell, a monkey can figure that out.  CEO demands more leads for sales god.  Leads, dammit.  Leads.
24. Re-do business plan for 8th time.  Fire up the troops.  This time we’ve got it!
25. Realize you have 87 sales people with 87 stories – none of which your company or product actually do.  Create customer support/satisfaction issues that even Mother Theresa couldn’t soothe.
26. Figure out that maybe you should do some actual market research to figure out if you have a technology/product that is looking for a problem to solve, or has a legit market opportunity and how to attack it.
27. Try to raise money to stay alive at an obscenely poor valuation.  Feel the life being sucked out of the entire organization as the slow march of death starts in earnest.
28. Quit and try elsewhere.

Whereas, what should happen, is simply this:

1. Come up with the idea.
2. Spend ALL of your time/money/effort A: validating/disproving the PROBLEM (not the idea), then B: presuming it’s validated, finding out exactly why, what, when, where, and how someone would part with money to solve the problem, then C: validating if your idea meets the requirements necessary to solve the problem, and then D: validating as to whether it is feasible to develop the product/technology necessary to solve the problem in the way the market wants it solved.

This seems so simple that it astounds me how infrequently it is done.  We carry so many pre-conceived notions because of our past experiences that we just “know” already, so we bypass this basic step.  I contend that by going through this exercise honestly and impartially (you can’t do your own market research – as you will always get the answer you want, not the one you need), over 80% of faulty companies (those who build it, and hope they will come) would never get off the ground to fail. Further, what’s perhaps most asinine are the VCs who dump $9M bucks into an A round betting that the entrepreneur with a track record “knows”.  No one “knows”.  If VCs spent $100,000 doing this exercise on any deal they were about to do, their portfolio success rate would climb by 20-50%.  There are plenty of other things that can kill a company down the road, but to spend money on one that is stillborn seems unfathomable – especially when you really don’t have to.

What VCs, and most entrepreneurs, do to make themselves feel better about their decision, is call a few people.  They call me.  I’m good, I can tell them what I think about the market and opportunity, challengers and the landscape.  But I don’t “know.”  I could find out if they really want to know, but they never do.  They then call their buddy at Goldman Sachs IT (probably the worst possible person to assess a viable widespread market opportunity) to ask them what they think of the idea.  Who cares what they think of the idea? (Remember the “market of one” phenomenon).  They do some background checks to make sure the entrepreneur isn’t a level-3 sex offender (which they will completely ignore if the entrepreneur hit a massive home run previously, of course), and stroke the check.  Fascinating really.

3.  Get money – based on what you KNOW, not what you THINK.

4.  Spend all your time and money developing the business plan:  what product (what features, what priority based on what the market research is actually telling you), what are the go to market assumptions, and what is the foundation marketing plan?  These things always happen too late normally.

People build it first, sell it second, and market it last.  Dumb.

5.  Manage the 3 efforts in parallel.  Development, Sales, and Marketing – way before you have a product.  Spend as much time – if not money – on each.  Imbalance will cost you.

6.  This is the most important thing you can take away from this rant: Understand your REAL objective – to maximize the valuation of the B round.

Let me say it again – your goal, once you do your A round, is not revenue, it’s not customers, it’s not product – it is to put yourself in the best possible position to attain the highest possible valuation for your B round.  Nothing else matters.  From your B forward you need to execute perfectly operationally – but before that, the game is all about the B.  Maximizing B round value has very, very different requirements than managing to show revenue or customer traction.  Maximizing the B round value is the difference between having financial room to make a lot of people rich, or making the VCs alone rich.  A crappy B valuation can handcuff all the parties involved down the road.  It is imperative that you focus on the B.  I’m amazed at how many entrepreneurs screw this up.

Don’t get me wrong, you should ALWAYS be looking to maximize your valuation – but never more so than between the A and the B.  Doing that, I contend, has little or nothing to do with revenue (although I like revenue, don’t misunderstand me), or product/engineering.  It has everything to do with marketing, messaging, and positioning.  Everything.  Will your valuation change substantially at your B round if you do $1.2M in revenue vs. $1.7M or $500k?  No (however, I suggest you don’t set asinine expectations with the board regardless).  There is no meaningful way to justify valuation on meaningless (in the bigger picture) metrics like $500k or $1M bucks.  No one is going to give you a $50M pre-money valuation versus a $13M valuation because you did twice your revenue number, if that number is only $1.8M.  So stop chasing the wrong goals if they aren’t helping you get to where you want to be.

7.  Build a “company” plan that is based on the “marketing” plan – that’s how you attain maximum value for B.  All other things being equal, nothing will have a higher return than an effective internal and external marketing/messaging/positioning effort.  Alignment is the critical factor.  Proper messaging not only keeps the VCs and outside world fascinated with you, but it keeps engineers and sales efforts aligned to the mission.  1 message, not 87.  Laser focus wins (ask NetApp, Data Domain, etc.), scattergram attack strategies don’t.

Easier said than done, I agree, but shifting priorities and perception up front from a business perspective can save you a ton of pain, money, and hair down the road.  Do it right up front, and your chance of success can grow by orders of magnitude.

Related posts:

1. Fail Factors – Why Startups Die: Revenue versus Valuation
2. Fail Factors – Why Startups Die: Financing Part 1
3. Fail Factors – Why Startups Die: Financing Part 2
4. Fail Factors – Why Startups Die: The Market of One
5. Fail Factors – Why Startups Die: My Personal Failure(s)