The journey from being a freshly minted start up to a mature growth company contemplating an IPO is undoubtedly an epic one. Not every entrepreneur gets to fully experience this dramatic arc. The select few that do collect their fair share of scars and war stories along the way.
Yusuf Ozdalga is a London based Partner at QED Investors with a focus on European financial technology and consumer finance companies. QED is the premier VC in the fintech space. Ozdalga joined QED in 2017, and his career has spanned roles as an operator, advisor, entrepreneur and investor. His current portfolio of investments include Wagestream, Zopa, and GAIN Credit.
As an investor, Ozdalga has seen his fair share of success and failure stories. With this in mind, he sat down with The Fintech Times to explain the five mistakes startups make which hinder their road to success:
What are the most common mistakes that founders make on their growth path – and can they be avoided? Based on our experiences, here are some of the most common pitfalls to watch out for.
Mistake #1 – Not hiring, or being too slow to hire, the right talent from the outside to help scale the organisation
I once worked for the credit card giant and top ten US bank Capital One. During its early days. we used to say that we were not in the consumer finance business, but in the people hiring business. Without a doubt, organisations that do not get hiring right cannot scale and compete successfully. Achieving this right requires a tremendous amount of skill, vision, and dedication from the founders.
And it is not only founders that should be involved in the hiring process. At Capital One, even new hires would often spend as much as 20% of their time on hiring and training new colleagues. In fact, recruiting was a common KPI across all levels in those early days.
Some of the most crucial hires are the ones that come in at the C-level and report directly to the founders. This is the layer that matters the most. If done successfully, these senior managers will free up the founders’ time and enable them to focus on identifying new opportunities and setting the vision. The key here is being very articulate about which role is needed, knowing what the ideal person looks like, and thinking a few steps ahead. In practice, this means that you should start looking today for the person that you will be needing in a year’s time.
Another important point is having a well-articulated policy and philosophy around hiring in terms of compensation levels – and being able to maintain a high bar to enter. After all, as the talent density goes up in an organisation, a certain kind of momentum is created that makes it easier to attract the best and smartest people. The highest performers always prefer to work alongside people of the same calibre.
Mistake #2 – Not promoting enough talent from within the organisation
While securing the best talent from outside the organisation is crucial in the context of a scaling company, one common mistake is that founders sometimes stop promoting the best talent from within their own teams. This can impact morale negatively, and result in some of the most loyal people being disenfranchised with their jobs. On the other hand, if high performing colleagues are promoted to more senior positions within the firm, this creates very strong incentives for everybody else to perform at their very best levels as well.
Needless to say, promoting every position from within is not the right answer, just as hiring for every position from the outside is not the way to go either. The key is to find the right balance.
Mistake #3 – International expansion
This is a particular challenge for companies based in the UK. American companies serve such a big market that they have the luxury of not focusing on international expansion in the early years. On the other hand, startups from smaller countries such as Estonia, have international expansion built into their DNA, as they know that is the only way to scale their businesses.
UK companies can sometimes fall between these categories, and sometimes struggle with their expansion efforts. One key insight here, is that the most successful international expansions tend to be founder-led. Hiring a small team to focus on a new country may look good on paper, but in many cases these hired guns cannot bring the same level of commitment and vision to the table that founders can. Hence, the optimum strategy here is to either hire or promote talent to take over the jobs that the founders used to do (for example running the UK market), while the founders then go and focus on expanding the boundaries of the firm.
Another common mistake in the context of international expansion is that the organisation does not commit enough to the effort – both in terms of resources as well as mental commitment. There is zero room for complacency here, because the effort needed to set up a new geography is ultimately not that different to the effort that had been expended in setting up the core business in the home market. Hence, rather than thinking of expansion as a simple copy-paste, a much better framework for founders to keep in mind is that they are in effect setting up a new company from scratch.
This is even more true in fintech than in other verticals because differing regulations and payment rails make scaling fintechs across national borders a much more complicated proposition.
Mistake #4 – Letting your valuation decouple from your unit economics
During the process of fundraising, a higher valuation seems like a universal good to the founders, but in many circumstances, this is not the case. Given the FOMO (Fear of Missing Out) that is quite prevalent in the VC community, founders can do a round at a dizzyingly high valuation. It is easy to become lulled into a false sense of security when valuations in each successive round keep going up, but if this is driven by market dynamics versus business fundamentals it can lead to problems down the road.
If not everything goes to plan, or if the market falters, the founders may find themselves in a position to do a down round. This can be very disruptive for a business and can create all sorts of HR and investor relations problems. So, it is just as important to focus on solid unit economics and sustainable business models. Capital markets, after all, can be volatile, and the best immunisation against market volatility is the vaccine of solid unit economics.
If successful, every business should reach a point in time where they are profitable and self-sufficient, and the north star to guide founders in that direction lies in following unit economics, not just valuations.
Mistake #5 – Not having the right investors around the table
Securing the right investors around the table can be a game-changer. They can help energise the team, make introductions, help with strategy, and even roll up their sleeves operationally from time to time. Attracting the wrong investors, however, can be a dramatically different experience. Beyond not adding value, the worst investors can actually destroy value by giving the wrong advice or pushing the company in a detrimental strategic direction. For each round of new investors that come in, the founders should do their share of reverse due diligence, asking the investors for references from their prior investments.
Most importantly, the right investor can help founders avoid some of the common mistakes along the journey, as they will have the pattern recognition to see when trouble may be around the corner.