I talked with investing giant Tim Draper about a wide range of investment topics, including some key mistakes that entrepreneurs can make early on in the life of their business. Draper is a seasoned investor who has partnered with many entrepreneurs to bring some amazing concepts to market, including Skype, Bitcoin, Tesla, and many others. Draper was an early investor in my company, Vungle, in each round of funding, which eventually sold for $780 million in 2019.
Draper identified three of the biggest mistakes that entrepreneurs make in the early stages of development for their companies.
Bad team dynamics
It’s really important to ensure that the founding principals fit together nicely. Draper said, “Team dynamics are probably the number one cause for failure early on. Sometimes, both principals want to be the CEO, and then you have a break. Sometimes there’s not enough faith—the engineer, the CEO and the marketing people don’t have enough faith in each other, and they’re always second-guessing each other.” It’s important to make sure that you have the right blend of people on your team early on.
Lack of fiscal prudence
Too much cash can be a bad thing! It seems counterintuitive and not that many entrepreneurs will identify ‘having too much money on hand’ as a big problem. However, Draper warns that investors can sometimes pour in too much money: “When they think everything’s going great, everything is great, and they figured it all out, they pour on too much money. If you have more money than you think you really even need, take a big portion of it and make it your war chest, because there will always be a time when you’re out of money . . . You always need to run very lean.”
Draper was an early investor in Vungle, and I remember, when things were going really well, everyone else encouraged us to “spend more, hire more, and do more.” However, that is not what Draper advocated. Amidst all the chaos and frenzy of early success, Draper’s advice was “Calm down. Stop. Build a war chest.”
Don’t Listen to Your Investor; Trust Your Gut
Surprisingly, Draper said, “Don’t listen to your investors. I’m one of them; I can say that.” That comment came within the context of the discussion about an influx of cash from investors when a company is doing really well. He explained, “. . . let’s say you have good customer product fit, and the thing’s going along fine. Then you get $10 million—a crazy amount of money to run with . . . That’s when, actually, it separates the truly great entrepreneur from the also-ran. The also-ran listens to their investor and spends that $10 million in a year, and it’s gone.”
Draper also spoke about trusting an entrepreneur’s gut, particularly about when it’s time to sell. He told a story of how he once pushed an entrepreneur not to sell a company when he was interested in selling, and that was a big mistake. He knew that it was maybe a relative high, and I didn’t. I thought, ‘No, no, this thing’s going to the moon!’ but he knew a lot better than I did. He knew his customers . . . In that case, I was a horrible VC.”
If you’d like to read about his advice to those who want to invest in startups, check out our article series here:
- Part 1: Practical Advice to Get Started
- Part 2: The Role of Fear in Investing
- Part 3: Investors Embracing Change
If you’d like to see the video of the entire hour-long interview, you can see that here: