Attorney David Muchow Explains How to Avoid Startup Failure
Your initial reaction might be skepticism on hearing there is another book promising salvation to entrepreneurs who are about to dive into those deep and dark waters or are already drowning. What could possibly be left to reveal about how to avoid the high fatality rate even in the first year?
But David Muchow's award-winning bestseller, “The 7 Secrets to Startup Success: What You Need to Know to Win,” draws on his unusually diverse background that is so extensive that even a summary could fill this entire article. A few highlights:
- He invented the world’s first, rapidly deployable renewable power systems for commercial and military clients (including the CIA) as co-founder and CEO of SkyBuilt Power for nearly nine years, winning an Edison Award.
- He has been CEO of Power Anywhere for 14 years, consulting on transformational energy solutions.
- He is the managing partner at David J. Muchow, PLC (aka MuchowLaw), which he founded in Arlington, Va., in 1990, advising a vast array of clients from startup incubators in Ukraine and social media companies to NATO contractors and Toyota.
- He has been an adjunct professor at Georgetown University for Law, Business, & Entrepreneurship since 2017, and early in his career served as a federal prosecutor and special assistant to the Assistant Attorney General, Criminal Division, at the US Department of Justice, law firms, and on Capitol Hill.
His book won the prestigious Kirkus Review Star Award for “exceptional merit,” putting it in the top three to five percent of the 10,000 books reviewed.
"I've worked with hundreds of startups and major companies for three decades, and over and over, I find that founders and leaders have read books about how to be successful, but these often fall short on practical advice derived from hands-on experience," Muchow told Startup Savant. “Entrepreneurs often have lots of technical expertise in their field and plenty of passion about what they want to do, but lack knowledge about the laws for forming a new business, accounting requirements, how to protect intellectual property, non-disclosure agreements, and personnel management, just to cite a few examples. With eight out of 10 failing in their first year, I decided to share what I know that could make a difference."
And the book is, unlike most on business, actually a fun read because each chapter ends with the spy-story adventures of Professor Scooter McGee applying these ideas, a story based on Muchow's own experiences.
At the macroeconomic level, Muchow notes, “Eight out of 10 startups failing each year is a $1 trillion hole in the US economy. Think if we had hundreds more companies like Apple or Microsoft — they would add millions of more jobs, jump-start the economy, and generate huge tax revenues. Let’s fix this!” Muchow then spells out a national plan to help solve that problem.
Lay the Right Foundation
“It's astonishing,” he says, “how many very smart wannabe entrepreneurs fail to hire an attorney with experience in startups to make sure they lay a solid foundation. Muchow explains the serious problems that often develop because founders mingle business and personal assets, get into partnerships, and discover too late that they have critical disagreements that kill companies, pay excessive taxes that easily can be avoided, or fail to have personnel agreements to protect the company from liability.
"One of the most common mistakes startup leaders make that leads to lawsuits is not having things in writing and the misunderstandings this leads to," Muchow explained.
Few new leaders know much about the business insurance necessary to manage risk. An insurance broker can typically find a basic umbrella policy for a few thousand dollars that you can add to as the firm prospers and the stakes become higher. There are three basic types:
- General Liability: This protects against personal injury claims, fire, flood, and other damage but can include riders to cover intellectual property, cyberattacks, employment discrimination, and many other risks.
- Special Insurance: In particular businesses with unique risks, such as food or flying planes, special insurance is necessary. Be sure you read the exclusions carefully, and some may look like non-insurance policies, they have so many exclusions, he noted.
- Directors & Officers Insurance: This protects specified leaders from personal liability when they are acting in good faith on behalf of the company.
Insurance aside, there are many other ways to deal with risk, such as placing your personal assets in a trust or a separate LLC, creating a separate company to handle a particularly risky product or service, passing off the risk to the customer or distributor contractually, or even turn it into a profit center, offering repairs, parts, and maintenance beyond the basic contract.
"Stay up on developments that may impact your risk, and be sure to read everything you sign," Muchow advises.
Another fundamental need is to engage an accountant to set up bookkeeping and use something like QuickBooks or other easy-to-use software so when you are small, you can input information yourself, ready for the accountant to use, which saves on your accounting fees.
Know How to Hire, Manage, and Fire
"A startup CEO will find that she or he is suddenly having so many crises that it is like drinking out of a fire hose, so be sure you are objective in assessing your strengths and knowing your weaknesses, as well as those of your partners," he wrote. "Personnel matters present some of the most difficult problems for entrepreneurs and businesses. Many companies fail right off because the founders don't agree on policy, financial matters, or have personal issues that create problems."
Some of the worst decisions he has seen involved hiring and firing. Many small companies do not fully understand the complicated state and federal laws about doing background checks. For example, depending on your jurisdiction, you may need written permission from the applicant to run a credit report, and you can only ask about prior convictions and pending cases, not charges that were dismissed.
CEOs sometimes forget that It is illegal to place an employment ad that shows a preference for candidates based on race, color, religion, sex (including gender identification, sexual orientation, or pregnancy status), national origin, age, disability, or genetic information. He suggests checking with a lawyer before hiring and firing employees or partners.
“The 7 Secret Keys to Startup Success” also has valuable appendices with model forms, including one that shows the table of contents for a personnel handbook covering everything from maternity leave and annual reviews to meeting confidentiality and layoffs.
How to Make Money
You may think your product or service is so ingenious that success is assured; you just need to get enough money to launch it.
But many times, the founders' starting idea ends up morphing into something quite different, and a major pivot is necessary. You can survive this turn of events by listening with an open mind to about 100 potential customers before you launch, he recommends.
“At first, you only have a hypothesis as to what your product or service is and who will buy it," Muchow explained. "You need to learn those things fast before the money runs out. Create a minimum viable working product, no bells and whistles, something that will give you feedback on what your product should be and who really are the customers. Then make quick adjustments.“
And above all, make sure your intellectual property is protected. Don't blog about it when you haven't yet filed (he explains the processes for getting patents, trademarks, and copyrights, including provisional filings, enforcement, and licensing).
But how to raise money for your dream? First, you need a financial forecast, a pro forma estimate, with reasonable assumptions based on market research about expenses and expected revenues, which should show you making a profit in three to five years if you want to attract initial investors.
"One of the most common mistakes in startup financial forecasts is underestimating expenses," Muchow wrote. He gives some ballpark figures for small companies, such as first-year accounting costs of $2,000, legal advice, $3,000–$5,000, and trademarks for the company name and logo and filing perhaps $4,000. A patent search and a provisional filing (only good for one year) could run as high as $2,700, and a non-provisional (more formal) application $6,000–$12,000, depending on its complexity and the number of claims.
He notes that, beyond your own funds, friends, and family, a good resource would be some of the hundreds of angel investor groups whose members look to seed promising startups (see the Angel Capital Association list). There are alternatives, such as a grant from a foundation or a Small Business Administration (SBA) loan.
Muchow lays out the parts of a solid presentation pitch to investors, especially the teaser (one or two pages that summarize the company’s opportunity and financial request), a 10-slide deck to elaborate (have them done by a pro, he cautions), and a business plan (15 or so pages that are easy to read; see his appendix for details).
Few entrepreneurs are experts in marketing (building awareness of a product or service) or sales, but with passion and practice, anyone can learn these skills, and you can hire those who have the necessary experience and talent as you move up a level.
Muchow himself learned the hard way early on, going door-to-door as a Fuller Brush man. “I learned not to take the first ‘No’ as an answer and treat it as an invitation to sell! Always be polite and agree with the customer and listen."
If you have never owned or managed a business but hope to, Muchow's handbook on his hard-won lessons on how to do it right across the entire spectrum of challenges would be hard to beat.
Muchow says he welcomes feedback from readers: email@example.com.