More often than not, tech founders in the Middle-East come from a business background with a clear understanding of the business opportunity they are trying to capture. They typically have a deep understanding of the industry and the pain points faced by customers with clear ideas on how to solve these issues. However, such founders often do not have prior experience in tech development and other critical digital functions such as search engine optimization and digital marketing. Making mistakes on these fronts can be costly and time consuming that result in the loss of market momentum for such startups. Here are the five most common mistakes we see business-oriented founders make that ought to be avoided:
- Embarking on venture building solo without cofounders. Digital venture building is a multifaceted challenge that is very difficult for one founder to conquer on his/her own. Due to the inherent complexities associated with tech products, digital sales and marketing as well as tech enabled operations, having a team of co-founders with a diverse skill set who are significantly vested as principals significantly de-risks venture building and also creates a higher level of investor confidence. As a matter of fact, several VC firms have established screening criteria to only consider startups with multiple co-founders for potential investments.
- Outsourcing tech development to a third party offshore service provider without a clear alignment of long term incentives. Founders who lack technical expertise often find the idea very attractive whereby a third party firm can fully take on the tech product development in a largely independent manner. In principle, outsourcing of certain roles to high-quality service providers can be an effective tool to grow your business, however, tech products are the core of a digital startup, and therefore, full outsourcing of tech product development significantly increases the risk for any digital startup. One can attempt to align the long term incentive for the third party provider through equity participation, however, the founder(s) need to also consider how relevant is their startup’s equity for the service provider as it is often a portfolio play for such service providers – it is worth noting that any such “relevance” assessment is not static as the third party’s business has its own dynamics and evolution. Founders need to ensure that their product is being built on the latest tech stack with a scalable architecture that can be insourced at a later stage if needed. In reality, this is much harder to achieve!
- Too slow to expand geographically. Fine-tuning the product and value proposition vs. expanding geographically are a constant tradeoff faced by founders on a regular basis especially in the first few years of the startup. Also, additional cash burn that is often needed to expand geographically and the required management strength can further complicate this decision. However, there is sufficient empirical evidence that shows that markets reward faster growth vs. profitability improvement in one geography in the earlier stages of a startup and geographical expansion in an obvious lever to drive growth.
- Underestimating the marketing costs especially in consumer oriented businesses. While it is true that digital marketing costs, especially in developed markets, have steadily gone up over the last few years, it is not a surprise considering all the marketing dollars that are getting repurposed from the physical world to online with an increased number of businesses trying to get the attention of the same customers. In this environment, a new consumer focused app essentially competes with all other consumer oriented apps in the race for downloads. However, most first time founders are not prepared for this high level of marketing spend as they typically build their business plans assuming a small fraction of the revenue / customer lifetime value would go towards the customer acquisition. Realizing that the cost of marketing is essentially driven by the number of consumer oriented businesses in a market, and not just your direct competitors, is often a major surprise.
- Not investing enough time in “marketing the startup” itself. Successful founders often highlight that they were always fund-raising. While these words literally might not be true, there is a great deal of insight in them. Well known startups attract more investor interest and find it easier to partner with relevant entities. Often founders are so busy building the venture, no mean feat in itself, that they do not spend sufficient time to socialize their startup in between funding rounds. They need to realize that socializing the company’s value proposition is a critical business activity that needs to be treated as an ongoing business activity vs. once an year event. Successful startups have one of the co-founders spend 30-40% of his/her time in being out and about networking and socializing the company’s value proposition in a wide set of forums to attract customer, partner and investor attention.