Startup Founders Need to Learn to Listen and Know When to Fold

Published in UT San Diego, October 13, 2014

A few days ago at lunch, I saw an old friend, a man who is on the board of a startup that had earlier come to us for money. We passed because we thought the founder wasn’t willing to listen — also known as the “unmentorable” syndrome.

I asked him how the company was doing, and he said the founder was killing it, had revenue, was headed to break even and had not spent a dime on marketing. I looked at him and said that now was exactly the time to pour gasoline on the product and marketing, and my friend said, “You are absolutely right, but the founder won’t listen to me.”

So let’s revisit my favorite Harvard Business School professor, Noam Wasserman, and see if we can better understand what he calls the “paradox of entrepreneurship.” Wasserman contends, “the very thing it takes to start a business often ends up destroying it.” Every book talks about passion, and in most cases, the founder has passion and lots of it, and that very passion often blinds our founder until he augurs the company into the ground.

There are a few critical junctures in the startup game. According to Wasserman, three major areas — market circumstances, career circumstances and personal circumstances — need to be carefully considered before you launch your company.

I am an expert on the first one. One of the rules in my book is “Never bet against the macro.” Allow me to remind you of a crashing failure of mine, a company I started three weeks before Sept. 15, 2008. That was the day that Lehman Bros. went broke. We tried to raise money in April 2009 when the Dow Jones industrial average was at its lowest point finishing at 6,600. Nice job, Neil. We ultimately failed. Wrong idea, wrong team and without question the wrong time.

Determining how big the market is and who cares is critical and often leads to a classic mistake — the founder knows that he would buy the product so he assumes everyone else would. In a Harvard Business School study of 800 founders, when a large percentage of them were advised to stop spending money, told that their idea wasn’t viable, that it was time to start over, more than 29 percent kept spending money and 51 percent kept spending time. On average, they doubled their losses before giving up on pursuing the idea.

Why is it so hard to stop digging the hole? When you find the answer to that one, you might consider offering it to some of our politicians and sports figures as well as startup founders.

Wasserman claims that the skill most lacking in founders is sales experience. They might be technical geniuses, but they never sold “nothing to nobody.” A small personal note: My first job at the age of 12 was going around my neighborhood with an electric knife sharpener offering to sharpen the knives.

My recommendation for learning to sell is to take an improvisation class. Thinking fast on your feet can be learned.

Next is the personal toll. “Honey, I am doing this for the kids, and when I hit it big, I will kick back and spend more time at home.” Welcome to divorce city. Or, “my spouse is on board and understands.” Before I believe that, I want to talk to your spouse.

And finally, the one that haunts 128 percent of all startup founders — dividing the equity. I will devote a whole column to this one later in the year, but for now, here is one immutable truth: If you have divided it equally, you have it gotten it wrong. Period.

There is a subtext to these issues and that is “knowing when to stop.” San Diego boasts incubators/mentors, but I have rarely seen one of them look the entrepreneur in the eye and say stop, it is not a good idea at this time. Mostly they offer encouragement and never want to hurt anyone’s feelings. By not telling the truth, you do the founder a deep disservice. You can be wrong, of course, but making sure they hear at least a soft dissenting voice will serve them well as they continue to dig the hole.

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Rule No. 374

If you have a short shovel, then you won’t dig too deep a hole.

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