When starting a company, it is easy to focus only on the product you are developing and the scope of services you want to provide. Easier would be to let the upkeep of financial accounts slip. Cashflow is a terrible and persistent problem with all the startups. While the major concerns are about how to get cash, startups overlook where their cash is going. While “bootstrapped” is what a part of the definition for startups is, running out of cash is why most startups die. Mismanaged cash has the power to take down a fundamentally strong and dazzlingly promising company. So, what should you beware of? Read on.
Too Much Optimism
Optimism, no matter how sunshiny and important, should not be too blinding. Be realistic, even a little pessimistic, about your finances. Do not invest too much, too soon while thinking that the sales would bring brighter-than-ever results. Sales can take twice as long and revenues quite less than expected. You can go bust before you even begin to achieve all that you have set out for if you let your cost increase before sales convert.
Think twice, thrice and again before spending on anything apart from developing your product and selling it. Until you have above-decent profits, you need to be tight with the salaries you are handing out – therefore, you need to be sure that the people you are working with share the same enthusiasm for your entire idea. Make investments only when the returns are clearly defined and fit within the timescale of how long your cash can last. Spending too much money on delivery capacity in the hypothetical hopes of a tsunami of demand is a bad idea. Unless you are terribly lucky, demand will only start as a trickle.
Scaling-up Before Time
Phase one – a startup refines its positions with early adopters and keeps pivoting until it has the right way of positioning its brand and product
Phase two – the company scales up
Investing more right in the first phase would not help. Spending on sales and marketing from the start would not result in better returns. Once you have reached phase two, you may start spending a little more and should be able to start to establish set metrics based on what works or doesn’t work for your business, and future growth.
Don’t Be Beggars
If you have run out of cash before you thought of raising money, no investor is going to take you seriously. Your management prowess directly comes under doubt. Even if you manage to raise funds when you are out of cash, your company’s valuation is not going to look too positive and you will look like somebody desperate for money. Result – you might end up losing most of your ownership. A classic case of “beggars cannot be choosers.”
It will be most advisable and much easier to raise money when you look like you do not need it – like Flipkart did after its Big Billion Day sale.
Exactly how much cash you need is impossible to be gauged from the start. Not raising enough investment is a disaster. However, raising too much from the start can only result in a smaller personal fortune when you come to sell. Pick the lesser evil.
In any case, be exceptionally tight until you have your objectives nailed, and until you understand correctly the financial metrics of how sales respond to investment.