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7 Costly Startup Traps Entrepreneurs Should Avoid

7 Costly Startup Traps Entrepreneurs Should Avoid
Image credit: Stéfan | Flickr

There is no shortage of individuals with great ideas. There is, however, a massive shortage of individuals who can execute on great ideas.

The gap between idea creation and execution is often not the fault of the individuals with the ideas, most of whom are working full time, possibly raising a family and have limited resources and skills to get started. More often than not, the would-be entrepreneur simply has no experience with starting a business.

In the past, aspiring entrepreneurs would turn to a mentor for help or simply set out on their own and learn as they went. These days, however, you can read startup books and find any number of tutorials online. With this rise in available resources, however, has come the inevitable business opportunists waiting to take advantage (and the money) of inexperienced entrepreneurs.

If you are new to entrepreneurship, proceed with caution when seeking help in the following areas.

1. Co-founders

Many businesses are founded by more than one person, often to fill needed skills, resources and responsibilities. If you are seeking co-founders for your business, keep in mind that anyone you find should have the same expectations as you about getting started.

Related: How to Weather the Storms of a Startup

For instance, because you most likely have a bootstrapped startup, you should beware any co-founder who has loftier expectations, such as a regular salary, expense reimbursements, commissions, an office, etc. A true co-founder will understand that to get a business off the ground requires sacrifice and grit.

You should put as much effort into finding and vetting a co-founder as you would a spouse. You will be just as financially and emotionally tied to this person or persons, so allow the process the proper energy and time to sort out.

2. Technical talent

It seems everyone has an idea for an app, website or other new technology. Entrepreneurs often set out to find tech talent with the hope of attracting someone to do the work for deferred payment or equity in the company. The problem is that too many developers have gotten burned in these deals, and most tech talent understands the chances of success for most startups are extremely slim, so finding someone under these circumstances is increasingly difficult.

If you need good tech talent, be prepared to pay for it, at least in the initial stage. Keep in mind, however, that you do not need to (nor should you) develop a full-fledged working model of your product or service. Instead, develop a minimal viable product (MVP), which provides the most fundamental benefit of your idea. Once you have tested it, developed proof of concept and market traction, then you can look to the next phases of development.

3. Service providers

As with tech talent, service providers, such as accountants, attorneys, distributors, printers, etc., would all love an opportunity to work with the next multi-million dollar company, but nobody wants to start for free. More important, if you have service providers willing to lower their costs for your startup, then the level of service you receive is often indicative of what you are willing to pay.

The most important services to pay for are those in which you have the least experience and understanding. If you understand nothing, then hit those books, subscribe to tutorials or find a very talented co-founder. Additionally, it always pays to have good legal advice, someone who can provide you with the proper company set up (especially with co-founders) and the needed expertise in specific areas, such as intellectual property protection. As with any business partner or vendor, always do your homework and check references.

4. Reviewers and bloggers

When I worked in the toy industry, there was no shortage of bloggers who wanted to review our products. Most wanted two or three free samples and a substantial fee to advertise on their websites. If you are compensating someone to review and discuss your product with their audience, it is no longer a review -- it’s an advertisement. The most honest reviews we received were from individuals who actually purchased our product, reviewed them, then sent us a link.

That is not to say that you should not leverage these resources as part of your marketing strategy. Sometimes, bloggers have huge and influential audiences and can help raise visibility for your product quickly. Add a discount code for consumers to purchase through your website and you are very likely to see a nice bump in sales. Before you partner with one of these resources, however, do your homework and assure that the reviewer has a good reputation and an audience that is part of your target market.

Related: 6 Sayings of Entrepreneurs Who Will Lead Their Companies to the Top

5. Product and industry awards

Most industries offer a wide variety of awards. Entrepreneurs need to understand that there are usually fees to be considered for an award and to use copyrighted logos or images to promote the award, which can sometimes run into the thousands of dollars. In many cases I have seen, paid business submissions rarely go without winning something -- we once submitted a product for a toy award that seemingly had a category for every submission.

Again, knowing which awards carry the most influence and positive impact requires careful and thoughtful research. While it is nice to have award logos plastered all over your website and products, it can get quite expensive and, if done in haste, can cause more harm than good.

6. Incubators

Small-business incubators, or organizations that assist entrepreneurs with taking ideas from generation to creation, are sprouting up all over the globe. Most provide amazing resources for budding entrepreneurs, but all have widely varying degrees of entrepreneurial involvement and available resources. More important, most incubators are not free. Some require upfront fees or have deferred compensation scales as the business develops, while others require a share of your business’s equity. 

If you are considering a business incubator, thoroughly research your target organizations online and in person. Reach out to administration to clarify terms and conditions of participation. Review the list of mentors and make certain that they offer the expertise and network you need for your startup. Understand the commitment required of you, which can vary from casual involvement to a full-time, on-site presence for several months.

7. Investors

Maybe the most intimidating step for an inexperienced entrepreneur is trying to raise money. Because finding the right investment partners can be tough, there is no shortage of individuals and businesses who promote their ability to find them for you. The problem with most is that they require a retainer to do so, often thousands of dollars and with no guarantees of success.

Investment firms (venture capital and private equity) and individual (angel) investors do not require you to pay a fee to be considered for investment. If they do, stay far away. The best (and arguably only) way to find good investors is to put the time and effort in yourself. Attend networking events and take an active role in local and regional business organizations. Also, be sure that you understand the expectations of investors, because you often only get one shot at making a first impression, so you have to make it count.

The common theme among all of these cautionary tips is "do your homework." Leverage online reviews, resources and references to your advantage and beware any individual or company seeking your attention and money that has little to none of these. Most important, network with other entrepreneurs and be active and visible where they meet, such as coworking spots and networking events. Startup entrepreneurs love to help each other -- and they are about the most reliable and affordable resources you will find.

Related: 6 Common Mistakes First-Time Business Owners Should Avoid