Editor’s Note: David Siemer, managing director of Siemer and Associates (a global merchant bank and advisory business) and Managing Partner of Siemer Ventures (a venture fund) has 16 years’ experience in investing in and advising Internet and software startups. In addition, he has launched startups of his own. In this article, he discusses the challenges of the building phase and what startups can do to ensure they can support a healthy growth rate.
SandHill.com: What is one of the most common mistakes that startups make regarding the pace of growth in their business?
David Siemer: A common mistake is over-hiring. In fact, we made that mistake in our own company as a startup. Towards the middle of 2009, it looked like the recovery was coming back pretty rapidly, so we quickly ramped up to about 11 full-time employees. But it didn’t happen like we anticipated, and we had to let our business catch up to where our staffing was. For almost a year we were overstaffed and had a higher payroll than was justified by our level of business.
SandHill.com: You said this is a common mistake. What causes startups to do this?
David Siemer: It’s very easy to get excited by what’s going on in the world and your own pipeline. You see all these wonderful things happening and you’re incredibly busy, and it’s easy to go a little too fast sometimes. A lot of things do take longer than people expect. You get 90 percent of the way on some new business or contracts. But getting that last 10 percent might take months instead of the expected weeks.
SandHill.com: Is there something in the entrepreneurial mindset, such as risk-taking, that is not very effective for making careful decisions on the pace of growth?
David Siemer: To look at the world and say “I need to change something” requires a different mentality than the average person has. A lot of venture portfolio companies end up in this same situation. They think things are going to happen easier and faster than they actually do, and they get a good bit ahead of themselves.
That’s why we only invest in companies that have very strong advisory boards and/or their CEO has started companies several times before. The first-time CEO or entrepreneur does make a lot of mistakes. There is a lot of value to having experience and having the right people around who can help guide the startup and say: “Wait until that contract is actually signed before you ramp up – it doesn’t matter if they verbally told you it’s coming.”
SandHill.com: Is there a pitfall in understanding when it’s not prudent to accelerate growth?
David Siemer: Absolutely. There are a lot of things that need to happen to make sure the startup is ready. Unfortunately, a lot of companies try to grow long before their product is actually ready. Many make the mistake of thinking that just because their product is ready for a certain class of customers that it would also be applicable to a larger market. They spend a lot of money on outreach, marketing and sales people before they find out that the product succeeds only in the more narrow needs and is not ready for a larger market.
SandHill.com: Why does this happen? How can they avoid this mistake?
David Siemer: It happens because they operate in a vacuum more than they should. A lot of companies make these decisions without talking to their best potential customers and really digging in and doing enough market research to understand where they’re going to be successful and how they should approach these markets.
I strongly advise startups to spend a lot of time networking and talking to not only their customers but also, more importantly, their competitors (not a direct competitor, but companies vaguely in a similar space). A lot of people don’t want competitors to know what they’re doing and they also think that competitors won’t tell them things. But that’s a trap in thinking; they really need to find out as much about the space as they can. And most don’t understand their customer needs as well as they think they do.
A lot of first-time entrepreneurs waste a lot of resources building a product that’s not as perfect as they thought it was going to be, even though they have all of the experience in the world in an industry and think they know exactly what the industry needs. It turns out they knew only what their last company knew and what their last customer needed; they didn’t really figure out the whole market.
SandHill.com: How can a startup avoid going to market too fast and thus wasting resources?
David Siemer: They first need to make sure they own a niche or a vertical. A lot of entrepreneurs are very concerned that if they don’t jump across all the market categories their competitors will see what they’re doing, and then the startup will miss the boat. They think a competitor will see shoedazzle, for instance, and then the competitor will become the shoedazzle of purses. They want to make sure they hit all the different markets before someone else comes in and realizes how the model works.
That mindset drives them to move forward much faster than is prudent. They go way too fast, thinking it’s going to be a land grab. But it doesn’t end up being a land grab and they waste a lot of money in marketing.
The company that wins has a really thoughtful offering and a perfectly positioned message.
SandHill.com: What is the third typical pitfall that entrepreneurs or startups make regarding their growth?
David Siemer: Not focusing enough time on the people aspect of the business. I made this mistake a few times myself. The most important thing any good entrepreneur can do is get the right people on the bus. But, instead, they usually spend a lot more time figuring out where the bus should be going, as opposed to really making sure they have the right team.
At my company, I now make it a rule to spend a quarter of my time talking to potential employees or advisors or people who can help our business. Many companies look at the HR function as they need to fill a hole. But it’s especially crucial for an early-stage company to find really dynamic people.
SandHill.com: What characteristics should they seek in the early people they bring on board?
David Siemer: They need to be really strong and also passionate about working in a startup company. Every startup is a rocky ride. I’ve seen a lot of entrepreneurs go out and talk to someone that, on paper, looks like a good fit for the industry and what they’re trying to accomplish. But it’s someone who isn’t really comfortable being part of an early-stage venture where there’s no job security and no guarantee of being paid next month. The people hired early need to have the mentality that it’s a startup and everybody is taking a hit in the short term to make the startup work. More important than their experience, the first few people on board need to be passionate, a little aggressive and creative.
SandHill.com: What about the management team? What should the founder/CEO look for?
David Siemer: My advice is to find a good partner who will be a real sounding board. My company leans a little more towards teams that are relatively equal partners because things usually run better in that company than one where there is a strong guy with a good idea and hires relatively mid-level or lower people.
There are a lot of examples of companies where someone wanted to be the leader and did it alone and became a huge success. But it’s a lot easier with a strong team than it is with just one guy and a bunch of workers.
SandHill.com: What is the fourth pitfall that impacts the pace of growth?
David Siemer: Being too beholden to the original concept of the company is a mistake. I’ve seen a lot of companies go through many millions of dollars of venture money, so convinced that they had the right idea that they were unable to see what could have been an obvious pivot into something that might have worked a lot faster.
A very sizeable portion of startups end up with a different business model than the venture company invested in. The original business plan ends up changing pretty dramatically until the company figures out what they’re actually going to do and how they will make a successful business.
SandHill.com: It seems change management skills are essential for a startup.
David Siemer: Yes, and as I mentioned earlier, getting the right people on the bus at the beginning is crucial. Startups need to look for super stars – really dynamic, super people that are incredibly passionate and have the wherewithal to understand that there’s going to be a lot of changes down the road. The super stars will help the CEO figure out that that the company is in the wrong place.
Even a super star account rep can have a big impact down the line. If you have an account rep that’s kind of a nine-to-fiver, you’re probably not learning as much about the account as you need to. A super star account rep will be very proactive and go above and beyond in trying to build the business, as opposed to someone who just takes orders.
Most small companies start off with a pretty narrow vision of what they’re trying to accomplish. The sooner they figure out the whole marketplace, the more successful they’ll be. Having super stars on board will help the company get there faster.
David Siemer founded Siemer & Associates, LLC in 2007 to fulfill his vision of a true boutique merchant bank that works with technology, software and digital media companies throughout their complete life cycle. The firm offers exceptional corporate capital raising, financial advisory services and M&A, specializing in cross-border transactions. In addition to investment banking, he concurrently founded Siemer Ventures to assist early growth technology companies to achieve their full potential. One of the most active investment firms in Southern California, Siemer Ventures claims more than 40 current portfolio companies and makes about 12 new investments per year. More information can be found at www.siemer.com and www.siemervc.com.
Kathleen Goolsby is managing editor at SandHill.com.