Startup Failure — Burning Cash Like a Bonfire
Most startups fail (sorry if I am the first to say this to you, but don’t give up yet. And feel free to check out our post on how to set yourself up to increase your chances of success). One of the hardest parts about startup failure is that startups fail for dozens of different reasons (usually a soul-crushing cocktail of these reasons…). And yet, there are hundreds of thousands of talented, hard-working, intelligent individuals, with extraordinary ideas, working day and night, trying to bring to fruition their novel, life-changing solutions to everyday challenges (some of which we never before thought had solutions). It would be utterly incredible if simply having an idea that could change the lives of many ‘round the world were enough to launch you to success, but there are so. many. factors. that need to perfectly align to allow an aspiring entrepreneur to break through into the market and access the people who they can help.
One of the crucial aspects that many entrepreneurs fail to recognize as they begin their adventure is that it takes capital, and a lot of it, to truly solve a problem. Sometimes, it’s in the thousands, however, more often than not, it’s in the millions. Another unfathomable, unfortunate truth for entrepreneurs who are new to the scene (and even those who aren’t) is how hard it is to raise capital (even if you already raised from an investor once, they may not come through for you the next time around, even for the same idea).
If you do happen to convince the powers-that-be that your idea is worth it, it’s like you’ve successfully won the golden teddy bear out of the machine with the giant claw. At that point, you’re excited, amped, ready to go 100 miles an hour. It’s great. However, the problem with capital is that entrepreneurs don’t always spend it well. I get it. If you’re not bootstrapping, chances are, you’ve never had this much money in your hands at once. It doesn’t seem finite and you may end up throwing it down the drain. I call this, The Bonfire Approach.
The Bonfire Approach
Take a deep breath. When building a company, there is one particular metric every founder should know like the back of their hand: The amount of cash available and the monthly startup burn rate. Companies are built on dollars, not just dreams.
All too often, companies go under because they spend money on “necessities” that are not actually necessary:
Hiring Staff Prematurely
Obviously, you can’t do everything yourself. You need talented team members who can take the reins on a variety of tasks (e.g. fabrication, programming, sales, advertising/marketing, customer service), so you can focus on building relationships with key stakeholders and building the company.
With that said, there is a right way to go about increasing the size of your team. Before making any hiring decisions, it’s important to accurately assess your needs:
- Do you have to have a fully fleshed out MVP or can you get away with a prototype to first test your product in the market?
- Are you putting yourself in front of enough potential customers to accurately determine the demand for your product (e.g. product/market fit)?
- What staff do you need to get to the next step in your growth plan?
Key Takeaway: Hire for the roles you absolutely need and only hire when you absolutely have to. While it’s nice to have staff churning through work on a daily basis, it’s not always practical.
Chasing Funding Before Customers
Gaining adequate traction in the market you’re going after is crucial. The reality is that, without significant customer adoption, you don’t know if your business idea is viable, and, therefore, has a product/market fit. Don’t try to conjure up money before proving there’s actually something to put money into.
To build a proper solution, you must first know the problem. Get out there and talk to potential customers. Find what they are struggling with, ask if they would use your solution, gain insight… It all matters. It’s essential to test your ideas with real customers before seeking funding, or you’re either going to get denied or walk away with a crappy deal.
Key Takeaway: Never take money if you don’t need it. In fact, the majority of successful entrepreneurs never take venture capital — according to the Harvard Business Review.
Taking Poor Advice
As a founder, you will meet a good number of people who are willing to provide advice. You’ll also find much of the advice to be inconsistent, and, in turn, you will find yourself extremely confused.
The truth is, you know your market and solution better than anyone else (or at least you should), so take advice with a grain of salt. Don’t act on every piece of advice that is thrown your way, and be cautious of individuals who want to get “involved” in your company simply because they have an impressive title.
As a founder, you should ask yourself the following when considering bringing someone on as a mentor, board member, or any other form of relationship:
- Expertise: How qualified is the leadership and their network? Will they help to increase expansion?
- Oversight: What level of engagement and guidance do we want from partnerships?
- Equity: Are you willing to forfeit equity for insight?
- Outcome: What do you want to gain from the partnership? Is this going to help accelerate the growth of your company?
Key Takeaway: The arrangement between you and another individual, or group, needs to mutually beneficial, with each bringing something unique to the table.
Choosing Inefficient Work Environments
Finally, many startups skyrocket burn rates by spending outside of their means. While it may be tempting to act like an established company, it’s important to stay grounded and realistic. That means cutting unnecessary costs wherever you can.
One of the largest expenses faced by startup founders is company workspace. Finding a workspace is expensive, especially if you live in a tech hub like Silicon Valley, New York City, or Boulder. If you can, start out in a small apartment or co-working space such as Galvanize or WeWork. This allows you to grow into space as your team grows. You can pay for “seats” and incorporate that into your costs when planning for new hires. Co-working spaces offer awesome benefits such as free coffee, beer, classes, office hours with industry experts, etc., all of which you should take advantage of.
Key Takeaway: Don’t lease office-space if you don’t have to. Look for a decent co-working space with the amenities you need. Galvanize or WeWork are both excellent options. (And free resources are your friend.)
Even if you do get your hands on bank account with several hundred thousand or million dollars in it, don’t let your mindset shift to spending mode. Like I said earlier, take. a. deep. breath. (Of course, congratulations are in order. But remember to be methodical about where it all disappears to.)
Avoid burning cash by sticking to your business plan and be strategic about how you spend your money. Don’t think of it as your money, because it’s not; it’s your investors’ money. Spend it like you’re spending your grandma’s money that she loaned you to get your startup off the ground.
Additionally, once you’re out, there is no guarantee you’ll get more (even from the same investor); prioritize what needs to be done to get you to the next phase and to prove you’re building something of value so that you’re more likely to be able to convince more people in the future that you’re worth them investing in (oftentimes, investors will give money to teams they like, even if they don’t feel the product is quite there yet, but we’ll save that for another post 😉).
Sometimes, you will have to be a bit spendy, and that’s okay, but be true to yourself and always ask yourself if spending more money will increase the value of the company.
Until next time… Best if luck!