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In for a penny, in for a pound only holds true until the pennies run out.
By all accounts, startups are usually designed to be visionary companies that dream big. But those dreams only last as long as their cash runways do.
The second biggest reason for startups to go out of business is because they are out of cash – the first is not having a market. From costs for equipment and office space, to marketing budgets and payroll, startups must be extremely mindful of where they put their money if they want to make it to an IPO or an exit.
Burning cash is not a bad thing for startups – it’s what they need to do if they want to grow. Without making growth-driving investments, companies may remain profitable but are unlikely to be able to capitalize on possible opportunities to make it big.
The average time between early stage funding rounds is 22 to 27 months, so startups need to have a clear idea of how to make their money last for at least the two years until the next fundraise, or in special situations, a bridge round of funding.
Managing Your Money
It pays for startups, especially early stage startups that have a shorter runway, to be thrifty with where and how much of their money is flowing out of the company. Here are three major cost centers that, if budgeted correctly, can maximize value for companies.
Build the right team
Startup founders can often get this wrong. Aside from paying themselves too much, some may choose to build a team that is too big for the company’s current stage of development, and some simply pay too little for talent that could take the company a long way.
Ideally, startups should not be penny-pinching when it comes to hiring good talent, especially those at the higher rungs of the hierarchy. It’s better to work with fewer and more capable staff than to build a large team that is confused about what it is doing.
One way to go about this is to outsource some of the jobs in the company. Payroll is one of the biggest cost drivers within companies (depending on labor laws in its geography) when items such employee equity and benefits are added. Outsourcing some roles, either to external agencies or to software, can reduce the cost burden on this front.
This can take the form of keeping a public relations agency on retainer for PR, relying on software to take care of accounting, or even adopting tools such as low-code to address application lifecycle basics while in-house IT talent focuses on solving more complex problems.
When making hiring decisions at the startup level, remember that all the roles and titles do not need to be filled immediately. Focus instead on hiring people whose contributions are essential to growth and survival, and pay them well, while looking at less costly alternatives for the rest.
Beef up R&D and product development
Finding and sustaining product-market fit is one of the most important things that startups need to figure out. This is not an area to skimp on. The idea that startups will figure the product out with time and pivot when the time comes is a bad one and can lead to consequences, especially if the company already has paying customers.
Startups need to find strong product-market fit if they want to stay in business, and the process will inadvertently absorb a lot of the company’s capital, starting with the research phase.
Invest to understand (a) what market gaps your solution can possibly fill, and, (b) what you would have to change about your solution based on target customer preferences. Then, spend time building your minimum viable product, test it out, and don’t be afraid to take it back to the workbench as many times as needed.
Startups don’t need to have the ultimate version of the product early on, but one that works well and delivers what customers want satisfactorily is a good starting point.
Focus on customer acquisition and experience
Users expect a lot more transparency, speed, and personalized experiences today than they did when digital technologies were still a niche. This is not only challenging for companies to build, but it also takes money.
Ideally, instead of going all in and trying get as much market share as you can immediately, focus on cultivating your customer base instead. Start with a small portion of the pool of customers while maintaining your pricing, instead of aiming for the entire pool with discounts or price cuts that can eventually become unsustainable and hurt your company.
The line of thinking that leans toward acquiring as much market share as possible in the early days of the startup can often be a fatal mistake, especially if the market is a big one. Instead, focus on building an innovative solution that users will love to use.
Keep an Eye on the Numbers
An autonomous vehicle company will spend money very differently from an ecommerce company, so this list is not exhaustive in any respect. It depends on how far founders want to take the company, and how much control over it they want to retain.
However, though the above costs are likely to be incurred across the board, there are also some expenses that founders should avoid where they can.
One, for instance, is a plush office space. While it may be great to have a corporate-looking office to walk into every day, having ideas and solutions that customers and investors are willing to place bets on has a greater influence on whether they will buy into the company’s vision than a swanky meeting room.
The same goes with nice-to-have software and fancy equipment – don’t invest in a deep data tool, for example, if the company does not have a large enough customer-base to justify or validate those insights.
The smartest thing to do is to invest thought before money, and plan the company’s investments down to the dollar. Make the budget as lean as possible, and account for possible contingencies that may require large outlays. Start by understanding how much cash the startup is burning through every month. Tools such as this burn rate calculator by Scale Factor are very handy in determining the burn rate if math is not your best subject.
Next, working with a cash flow management tool such as Pulse can help not only with cash flow analytics, but forecasts as well.
Third, give some dedicated thought to which tasks require employees, what can be done by software, and what is not necessary, and remember to constantly revisit this categorization to accommodate your company’s evolving needs.
And finally, be unafraid to ask for advice and admit that your startup may need help. By seeking advice on maneuvering through financial quagmires and learning to manage money right, you may well be extending the lifespan of your early-stage startup.
Header image by Jp Valery on Unsplash