5 Most Common Mistakes Made By Startup CEOs (And What To Do About Them)

Being in the driver’s seat of a growing startup as founding CEO is no easy job, and unfortunately, there’s no GPS to tell you what to do when you approach a crossroads in the life of your company.

Brett Fox has traveled these roads before as the CEO of his own startup and as entrepreneur-in-residence at a VC firm. Today Brett works as an advisor and coach, counseling startup CEOs on navigating the ups and downs of raising capital and building a successful company. And while working with an advisor may not be the same as having turn-by-turn directions, it’s at least a little like road-tripping with someone who’s familiar with the landscape.

On an episode of How I Raised It, Brett shares what he’s learned from making or observing mistakes common among startup CEOs, as well as how and when to hire an executive team, what to do if you lose a co-founder while fundraising, and how to get investors to compete for your deal.

CEO FAQs: 5 key answers for startup founders

Brett hears a lot of the same questions and pain points from his clients, whether they’re leading bootstrapped operations or companies with $150 million in funding. And while no one answer will solve the problem in every situation, Brett’s experience working with dozens of startups can provide some guideposts for CEOs to look to.

Read on for answers to some of the most pressing questions CEOs face while raising capital.

1. When should you build out your executive team? What investors expect to see at each stage.

For startups fundraising in the seed round, it’s not necessary to have a complete team on board. At this early stage, you probably only need one senior employee beside yourself as the founding CEO. If you’re the technologist, then consider bringing on someone in marketing. And if you’re not the technologist, make that second person your CTO.

But, Brett says, by the time you begin fundraising your Series A and beyond, investors are going to expect a reasonably complete executive team, which may include:

• Yourself as CEO
• A VP of engineering or a CTO
• A VP of marketing
• A VP of sales or the beginnings of a strong sales team, especially if your annual recurring revenue (ARR)  has topped $1 million
• A VP of operations, especially if you’re in manufacturing

You should think about hiring a CFO when you’ve hit $1-10 million in ARR, and you definitely want to have them on board for your Series B.

Mapping out the transition of sales leadership can be challenging, Brett says.

“You're going to be the best salesperson for your company for the life of your company, period, end of story,” he says, explaining that at first you will be involved in every sale but that over time you can hire strong salespeople to generate leads and learn to replicate your process.

Once you’re ready to significantly scale your revenue, a world-class VP of sales can help make that happen.

Brett sometimes sees CEOs make the mistake of waiting too long to hire key executives because they’re afraid of losing equity.

“If you don’t hire the key executives, it’s not going to matter because the investors are going to see risk,” he says. “Your equity is going to be worthless because you’re not going to be able to raise money for your company.”

2. What do you do if you lose a key executive or co-founder while you’re fundraising?

While this is a situation that no founder wants to find themselves in, it does happen — and it happened to Brett.

He says he received varying advice, including some people who suggested not telling investors what’s going on. This is a huge mistake that will lead to lost deals.

“What are you trying to build when you're raising money?” he says. “You're trying to build a relationship with somebody, and it's based on trust. So what happens now, if I'm misleading somebody on the other end of this? Well, I've lost my trust.”

Being honest and getting ahead of the story is the best way to handle a critical departure — and any other bad news you may have to deliver to investors.

“You control the information,” he says. “You have the ability now to explain to people what's going on and why and what your plan is. If they find out before you tell them, then you're going to be on the defensive, and it's going to appear like you're hiding things. And that's when you lose your investors.”

3. What common pitch meeting pitfalls should you try to avoid?

Some of the faux pas that trip up CEOs in pitch meetings are:

• Bringing too many people to the meeting. Spending too much time introducing your amazing team abruptly halts whatever momentum and excitement you’ve created so far. Bring one or two people with you and rehearse your bios so you can move through the team slide in five minutes or less.
• Taking too long to get to the point. Brett says your pitch has two jobs to do, and both should happen in the first moments of a meeting. First, create an emotional connection with your auience. (Think about Steve Jobs opening his 2007 keynote with “This is a day I’ve been looking forward to for two-and-a-half years.”) Second, tell investors the problem you’re solving and how you’re solving it. Once investors are interested, then you can tell the rest of your story.
• Not knowing your numbers. Even if you bring your CTO to the meeting, it’s your job as CEO to have certain stats at your fingertips — think revenue, break-even point, and your break-even date. If you don’t know these figures, it shows investors that you’re not in control of your business.

4. How can you encourage competition among interested investors to get the best deal?

“It’s hard enough to get a term sheet,” Brett says. “But if you can get multiple investors competing, that’s when you can get the best deal. So how do you do this?”

Once you’ve had your initial meetings and a few investors are getting back to you and signaling their excitement, open up your data room for them to review — but put a deadline on it.

Give investors a month or a few weeks to review your documents and ask questions, but indicate that at the end of the month, you expect an offer.

Of course, this only works if you have real traction with investors and if you’re staying on top of your process.

“The mission here is to make it really easy for your investors,” Brett says. “If you’re making it difficult, then people are going to walk away because there’s always another deal.”

5. What should you put in your data room?

Your data room — whether you create it in Dropbox, Box, or another platform — should include all of the relevant documents and information investors need.

• Your complete financial information — income statement, balance sheet, cash flow statement — in detail
• Competitive information on every competitor in the market
• Detailed market information
• Technical diligence information

Feel free to show some creativity in your data room — Brett recalls a company that made baseball-style cards for each of their competitors, complete with key stats about each company.

Navigating the path of a startup CEO is challenging. But seeking out trusted resources and advisors can offer insight when you reach those turning points in your fundraising.

“You’re looking for people to fall in love,” Brett says. “Make it easy for them. Build that emotional connection. Get people excited by what you’re doing. That’s your mission.”