How you’re subconsciously burning your funding
We’ve heard inspiring stories of startups who started with less than $500,000 of venture capital and have made it big in the industry eventually. Uber, for example, began with a seed funding of only $200,000 when it was launched in 2009. Now, they’re included in everyone’s top unicorn list.
Overshadowed by these successful stories are startups who didn’t enjoy the same stroke of luck. Here’s the thing: 90% of startups fail, and this failure has become so commonplace that entrepreneurs have even started to go along with the “fail fast” mantra. It’s no secret that with failure comes great learning, but this doesn’t mean it’s completely okay for you to suffer the same fate.
With our experience in working with startups at different stages, we’ve learned that fund maintenance is one of the main reasons startups fail. The finding is further supported by a report by CB Insights, highlighting how running out of cash is one of the top reasons why startups fail. In fact, it comes only second to startups creating products without a market need.
Startup founders’ problem with maintaining cash for their businesses can be attributed to their professional background. Most of these founders come from the software development industry, which could mean two things: a) they don’t know how to manage a business, and b) they don’t know how to handle their funds.
While we recognize the importance of entrepreneurial spirit in being innovative to start your own business, let’s face it: it takes more than that for your startup to succeed.
On the other hand, those with a background in business are not well-versed in managing product development. An extensive background in technology is just as important when it comes to managing your startup. Even seasoned entrepreneurs with a bit of knowledge in finance can get caught in the pitfall of burning their funding easily.
For new startup founders, the common mistake is an overestimation of funds. You may think that your existing fund of $200,000 is more than enough to keep you completely secured for over a year, but trust us when we say that it won’t.
Typically, a funding of around one million dollars will last between 10 and 12 months. It might sound like a good grace period, but you shouldn’t be too relaxed about it either.
Some entrepreneurs also fall into the mindset that further developing their product or software guarantees more funding, which is not correct. Don’t burn your funding quickly by spending too much on developing your product when you haven’t secured the market need for your product yet. Growth should lead investment, not vice-versa.
Here are some other ways you may be burning your funding without noticing it:
1. Not Defining Your Project Scope and Requirements Clearly
Many entrepreneurs don’t recognize the importance of preparation in developing their product requirements. Lack of preparation could result in building something that has not been well thought of.
Some of these entrepreneurs even jump into the development process without knowing exactly what they want to build and changing the almost non-existent requirements in the product development all the time. This will inevitably lead to delays, higher costs, and a lot of frustration.
The worst case scenario is that the development fails completely because the result turns out to be entirely different from what was wanted, the solution is never shipped because funding runs out or the product becomes too complicated and unusable.
This is why it’s critical that you, as a startup founder, seek the guidance of professionals in developing your product.
2. Not Maximizing the Capabilities of Your Employees
After you get your first check, it’s easy to get caught in the excitement of earning your own revenues and to make the mistake of hiring more employees. You may think, “I’m finally making money and the workload will only start to get heavier from here. I need new people.” Wrong.
Don’t make the mistake of hiring people prematurely. Before you think of adding people to your team, evaluate first the positions that you will need in the long run.
If you think you need five developers right now, don’t fill up all the positions immediately. Instead of hiring people on full-time positions, consider hiring freelancers instead or a dedicated software development team. Development outsourcing is your solution for a lack of developers.
Hiring prematurely is one of the factors that caused Licom Technologies’ demise. The company acquired new communications equipment that required extensive testing. At the same time, Licom was paying salaries to salespeople who had nothing much to do while the new equipment was being tested.
You should also consider the capabilities of your current employees and if they can still cover the new requirements of your business. Stretching your workforce is a lot less painful than doing layoffs, later on, to cut back on your costs.
3. Not Thinking about Scalability
Most startups want to own everything immediately—from infrastructure to office space to talents. The problem when you’re still starting is that you can’t risk too much of everything, as you might lose it all.
Before you start investing in your office needs, think of your long-term goals first and consider multiple scenarios. Do you really need to rent an exclusive office space right away or will a co-working space do for you and your small team?
Consider the following options first:
Outsourcing Talents – From payroll, accounting, and bookkeeping, there are now several outsourcing firms that offer these services. If you also have other business functions that can be digitized and don’t require maximum supervision, we suggest you consider outsourcing them too. It’s a lot cheaper than getting full-time hires.
Secure Cloud-Based Solutions – Turning to cloud-based solutions can increase your productivity while helping you cut back on costs. It allows you to have your employees work remotely as well.
4. Focusing Too Much on Being the Next Big Thing
Startups usually compete for media attention and recognition from investors as first of its kind. We understand the charm of novelty and wanting to get the word out that your company exists to offer a solution for a problem.
While PR can help you get additional funding, don’t get too hasty either, as it can quickly burn your funds.
One way to reduce costs for your startup’s PR is to assign a spokesperson. This spokesperson should be knowledgeable enough about your product and should establish a long-term relationship with journalists.
Instead of hiring a PR agency for your promotion, you may opt to outsource a PR practitioner instead. PR practitioners often have several connections with industry writers and can help you get the periodical publicity efforts that you need.
5. Competing for Talents
It’s understandable that you want to get the best team out there. But, at this stage, you will always be limited by your budget and location. Getting a full team of top local talents requires great compensation packages that you might not be able to afford right now. Hiring also takes up precious time that could be spent building your product instead.
If you want to get quality work at an affordable price, consider outsourcing from abroad. Many projects run extremely well with the CTO and 1 or 2 developers on site and the rest of the team overseas.
Also, outsourcing will not only save you money but also give you access to a great pool of talents, which you may otherwise not find within your radius. If you’re looking for top software developers, for example, developers in the Philippines can offer you affordable solutions for all your development needs.
With our extensive experience in developing solutions for different types of clients, coupled with our knowledge in managing startups, Arcanys can help you optimize your available resources and ramp up your team quickly to get your product to the market.
Think you have a solid startup idea or solution? Talk to us today. Who knows? We could be your next angel investor slash development partner.
Related read: Common Starup Mistakes to avoid