Why You Should Not Under-Capitalize Your Venture
The Reason Why 90% of Startups Shut Down
Undercapitalization is one of the most significant problems faced by startups. And is one main reason for 90% of startups to shut down. You don’t need large funding to start a business, but you do need a bare smallest amount of capital for survival.
Undercapitalization occurs when you don’t have enough capital for your day to day operations.
This can be either because you are not able to generate enough cash flow or you don’t have any external funding backups. It can slow down your growth significantly because you may not have enough resources to expand or hire a team. And eventually, it may lead to the failure of the company.
While starting a business, everyone knows and does proper research and planning. But the common mistake everyone makes is, you plan that you will build a kickass product or solution and you will sell it to make money. Usually, this plan will have two possible outcomes,
- You have enough work-in-capital. And, you have a good team and build the right product after through research and experimentation. You will do proper research on the market, customer, competition, etc. before executing your plan. Because most of the time, the idea doesn’t fail, but the execution fails.
- You will assume that your product will sell for itself. So you don’t have a good team from day 1. You don’t have money or time to test your product or analyze your market and customers. You will know the obvious outcome of this assumption — after a few days of run, the business will be dead.
While starting your business, you need to define how much money you need to build and test your product. You don’t necessarily need to start with how much investment is required, you can start with what is the milestone you need to achieve and do what resources you need, how much time you need, etc. and work backward towards capital required. Always, whenever you do financial planning, include a buffer of 25% and then raise that capital before starting your business.
Here are 5 tips to Avoid Undercapitalization,
1. Choose the Right Industry
Never start a business in the domain in which you have zero or little knowledge and experience. Lack of experience can lead to underestimating as you will not be aware of the nitty-gritty of the domain, challenges faced and bottlenecks of the domain. Rather than wasting your energy, time and resources into something which is not your key area, focus on your strength.
2. Have a Business Plan
If you are looking forward to raising investment from external investors or lenders, the business plan is the basic necessity. The business plan is not just for outsiders; it will also help you to have a clear roadmap ahead. Your business plan should have basics of starting your business, go-to-market strategy, market analysis, competitor analysis, customer analysis, financial plans, targets et. Set realistic targets. Consider worst-case scenarios and keep backup plans.
3. Get an Accountability Partner
Many entrepreneurs start a business just because they want to be their own boss. What many people don’t realize is that it doesn’t matter if you are small owners and CEOs of bigger corporates, you are accountable to the board of directors, investors, customers, etc.
Also, many entrepreneurs think mentors as a waste of time and believe that they are good at everything. But having someone who has more experience than you is always an asset.
Every entrepreneur should consider having a mentor, accountability partner, business coach, advisors, etc. who can help them and their startup grow. Having someone outside the company always brings in fresh perspectives. When you are looking for an investor, look for someone who can also be your mentor or coach, and before you on-board them check their experience and domain knowledge.
4. Differentiate Your Business
In today’s digital world, customers have so many choices to choose from, so you will have to figure out a way to differentiate your product or service. If you are not standing out from the competition, sooner or later you will get lost in the crowd. Before starting a business, ensure you a compelling reason for users to choose your product or service over others.
And, moreover, in the process of creating the difference, don’t lose your profits. As if you cant maintain a profit market, your business will not survive long.
5. Provide Stellar Customer Service
Customers love those brands who take care of them. If you can differentiate your customer service from others, your business will grow. You will be able to retain more customers. Happier customers are directly proportionate to more cash flow.
In a nutshell, having sufficient capital buys you time and people to properly execute your idea. Be wise about how you raise money and how you spend it.