One of the top reasons that startups fail is the fact that they don’t know how to manage their pockets, according to Inc Magazine. It’s not like many startups are headed by people with fancy degrees in business management. You’re just a guy or a lady with an idea, and you’re kind of busy developing that idea. In fact, you’re sometimes so busy that you forget that ideas eat money. Or maybe you know that they need money, but you have a tendency to have a lot of “oops” moments when the time comes to pay the bills.
The majority of startups that usually score A-series funding don’t get any further than that; either because they’ve demonstrated that they don’t know how to spend wisely, or, well, that’s it. The fat budget is a killer precisely because it could boost your confidence too much. Let’s look at what makes a startup essentially unable to sustain itself financially:
- Failure to take repeating payments into account – It’s a common mistake that people make when a large chunk of cash gets dropped on their doorsteps. Mega-corps can handle small hiccups in accounting, but you can’t afford to lose a penny more than you should, even with a 100K initial round. If you have a headquarters, rent servers, or whatever, you need to factor those for every single month. Assume you won’t be profitable for years. How are you going to sustain everything? Figure out what money you need to set aside to keep the lights on for the next three years, including unexpected costs and price hikes.
- Likening investment and initial customer bucks to profitability – Got a big fat check for 25K? 50K? 1M? Guess what? That’s not profit. You’re still a seed. It’s your job to turn profitable using that investment money. Just keep it in mind: An investment should never convince you that you’re already profitable. Got paying customers? Cool! You still need to set aside a huge wad of that cash for taxes and other stuff that are meant to punish you for being so awesome.
- Wasting cash – Of course you know not to spend all your startup’s money on a naked bronze statue of yourself, riiiiight? It’s a no-brainer! Or maybe it’s not. Many startups crash and burn particularly because they waste money on things that weren’t necessary. And, of course, as ideas come in, you feel that you must implement them. Everything you invest in must pass the following test: Is it so essential that customers will not want the product you offer if you don’t implement it? Keeping a product competitive is important after you’ve attained profitability and got your feet wet enough.
- Blaming other people for what’s wrong – When you blame someone who’s not in control of the situation, you’re essentially committing “startup suicide.” When something goes wrong, it’s your responsibility to make sure that you can steer the boat in a better direction. Shifting blame doesn’t address the core issue, and will lose you plenty of money.
- Charging less than your product’s worth – This is a common mistake that rookies make. Account for overhead when determining the price of your product. Your competitors will obviously be cheaper in the end because they have more scalable infrastructures and technologies that can help them cut costs. Right now, you can’t afford them. Focus on surviving.
In the end, the last point should ring through the most. It’s most important to make sure you can hold your head above the water. And then, if you feel like you have a little more elbow room, you can start being more generous!