June 8, 2020
Why Startups Fail – Money
Most people will say that money is typically the reason why a startup failed, but that doesn’t take into consideration all the reasons why companies fail. In this series, we have discussed inexperienced teams, lack of influential connections, weak execution, and lack of vision. All these may be the cause or a contributing factor as to why a startup failed.
Lack of money is a nightmare. I know the sleepless nights trying to figure out how to make the next payroll. I remember negotiating with vendors to give me another month to pay them. I’ve been there, and no one wants to be in that position.
Funders also capitalize on struggling startups. I recently overheard a Silicon Vally investor talking to a colleague telling him that he was interested in funding a certain startup. The gent responded, “I’m gonna wait six months until he runs out of runway to give him a term sheet.” In this way, he can get more from the startup because he may be the only one who’s willing to fund them at that time, when the owner is desperate to keep the lights on.
Practicing good financial planning from Day One is critical. You don’t need a fancy office. You don’t need Aeron chairs. I started up a company with just my co-founder and we had used furniture and the office was behind a newspaper company on the second floor of a furniture company. Each one of us handled separate parts of the business: I handled customer servicing, web design and development, and marketing. My partner handled finances and sales. When we finally started hiring, we moved to another space and people had plywood and saw horses for desks and they faced each other on both sides. They complained about splinters. We gave them sandpaper. We got the cheapest rent and had to deal with rats chewing our wires. Keeping costs down is critical.
Don’t hire until you absolutely have to. Use freelancers for specific short term projects, call in favors, barter services (free web site for setting up our network, free web site to handle a H1B visa, etc.), and if legal in your area, call colleges for unpaid interns you can mentor and do some of the grunt work. Masters programs are ideal since they can put their newly learned theory into practice. I’ve done all of these things to reduce costs.
Get credit cards for anyone doing sales/marketing and pay them off each month to establish a credit history. Establish a line of credit as soon as your company is showing revenues quarter-on-quarter (how many will depend on where you are). Then hustle. Get on the phone, cold call businesses in your target market and introduce yourself. Establish whether they need your solution. Find the decision maker in the company and get to work selling. The more revenue you make and the less money you spend, the longer your runway will be and will keep you from giving away more than you bargained for to a potential funder when you have no money left to keep it going.
Money will always be a problem in a small company, especially one with no recurring sales to existing customers or diversified business models with consistent revenue, where one may be strong during down cycles of another. Consider these options as you start evaluating your idea. You may come up with something that needs nothing more than seed money to get started and then revenue does all the rest.