The Top Traps Every Entrepreneur Should Avoid

How to sidestep the most common mistakes

26/12/2013 Madrid

Alberto Fernández Terricabras

Excessively high salaries, minimal capital injections, missing the mark in defining each employee’s responsibilities, half-hearted dedication, provoking mistrust in the investor. These are among the common mistakes that trip up entrepreneurs when they embark on a new venture and particularly when it comes time to secure financing.

How to identify these potential pitfalls and sidestep them was the main topic of the Alumni Division’s continuing education program, "Entrepreneurs’ Top Twenty Blunders," led by IESE’s Alberto Fernández Terricabras on December 9 2013, on IESE’s Madrid campus.

Convincing investors, for example, is pivotal for getting a new business up and running. This is one stage where many entrepreneurs go wrong. They may inadvertently elicit feelings of mistrust, be prone to excessive spending with no regard for necessary austerity me asures, be lacking negotiation skills or have difficulty executing their plan. Any of these can make it hard to find investors.

"Paying entrepreneurs excessively high salaries can go against the interests of getting the company off the ground. Salaries should certainly be adequate, but always tending towards the lower end," recommended Prof. Fernández.

From his experience at FINAVES, Professor Fernánádez Terricabras outlined other specific points regarding financing that should be kept in mind. "A high salary and a low capital injection on the part of the entrepreneur is a very unappealing combination for the investor," he told the audience. According to him, entrepreneurs who are willing to assume greater risk will have an easier time securing financing.

At the same time, it is vital that an entrepreneur demonstrates complete commitment to his or her idea and dedicates all of his or her time and energy to moving the endeavor forward. "A part-time commitment is not conducive to the project’s growth or profitability," he explained. He also underlined the importance of clearly defining what responsibilities each partner will carry out within the business.

Passion for your product

Other mistakes are directly related to how entrepreneurs understand the project they are setting in motion. Those with a half-hearted enthusiasm for sales, or for the product itself, or who see the company merely as a form self-employment are bound to fail. "Investors want to see that the team they are putting their money into has the talent to bring the product to market and is excited about what they are selling. In addition, an investor wants to see evidence of growth and scalability," he said.

Prof. Fernández reflected on how unfortunate it is when entrepreneurs neglect to identify the right partner when it comes to running their business. He also encouraged entrepreneurs to take on more variable fixed costs when negotiating with investors. Furthermore, they should always understand and know how to explain exit options to an investor, and always be willing to sell. "The entrepreneur has to understand and accept that the company is not his or hers alone; it belongs to all of the shareholders," he stated. To conclude, he pointed out that the investor is the one who defines the timeframe for negotiation and that: "when you secure one investor, it is much easier to secure subsequent ones."