You know that road to startup success or failure? Well, it’s paved — for better or worse — by cash flow.
If your company is blessed with enough capital, it can be a smooth, serene Sunday morning drive to success. Find your business cash-strapped, though, and all the bumps and potholes imaginable will flatten your tires and impede your progress.
A dearth of financial resources is a big issue for startups. In fact, First Round’s State of the Startups 2016 found that 24 percent of respondents counted a lack of capital as the reason their startup would succeed or fail.
Investors understand this challenge all too well. Samsung NEXT recently launched a $150 million venture fund focused on smoothing out the funding road for those early-stage tech startups.
Just as challenging as obtaining capital, however, is managing it. And the implications of that mismanagement are heavy. Without money, a business can’t operate, which is usually the death knell for a startup journey.
The Fastest Route Isn’t Always the Best
Every day, we see startup founders struggle to properly manage their cash burn and runway. The latter refers to the length of time a company can remain solvent without additional fundraising, and it should be your startup’s primary financial concern.
Ignoring your cash runway is easy, especially when you can blow through it by purchasing a cool office locale or fun, fancy gadgets. Unlike that physical space and those cool thingamajigs, a cash reserve fills your bank account and gives you greater peace of mind.
There’s something else to keep in mind with outside capital. Investors — as much as they don’t want you to believe it — aren’t trendsetters as much as they are followers. They'll jump on cool bandwagons in a heartbeat.
For instance, AI and VR are seeing an influx of investors. A few years ago, big data was in that boat, but those investments are beginning to decrease as evidenced by a Gartner study showing that though investments in the industry rose in 2016, the number of people planning to invest in it in will dip six percentage points in the next two years.
So if you’re in a once-hot industry that is starting to cool or mature, there’s a good chance you’ll see new money drying up. So hold on to what you have right now.
Pick the Right Road
Although your company’s long-term viability is determined by all sorts of variables, showing that you can run a lean operation in tough times will only be a positive down the road. When later investors see that you’ve prioritized your cash flow, it shows them you’re smart about finances and growth strategy.
With that in mind, it’s imperative that your startup gets the most out of every dollar by drawing on these directives:
1. Know the road in front of you.
How much are you spending each month? Know the answer down to the dollar. In the earliest days, your primary expense is overhead, so consider the cost of employees, office space, and equipment.
And always be aware of your runway — or how much time you have until the money runs out. Working backward from the end of it will help you set up the proper goals, particularly in terms of revenue.
The companies we've seen successfully navigate a dry funding climate have one thing in common: a strong, robust accounting system. That way, the founders are always aware of the financial situation and can easily make necessary adjustments.
2. Use your mirrors.
There are countless variables in business. Rather than focus on those, though, work on controlling the costs you can manage. Start with no-brainers like having employees park on the street rather than providing garage parking, eliminating monthly lunches, or canceling “Free Beer Fridays.”
Door to Door Organics is a great example of this. Today, the online grocer of natural and organic products employs upward of 200 people nationwide, but that wasn’t always the case. Even after years of growth and profits, founder David Gersenson was running something of a one-man show, handling customer service, billing, and many deliveries on his own until he built enough of a revenue base to bring in others.
3. Mind your tank.
Once you have a handle on your costs and runway, it’s time to extend the latter by bringing in money. Do you have a basic version of your product ready for limited sale?
If your target is enterprise, can you get a pilot client on board? It doesn’t always make sense for startups to go these routes, but it's important to ask these questions and give their answers a hard look.
There are other ways to bring in money, too, like using your own funds. In the short term, that isn’t ideal, but it can pay dividends down the line. The co-founders of Tableau cobbled together a few thousand dollars of startup capital when bootstrapping the data analytics and software company in 2003. The trio made cuts to their personal spending, hired strategically, and spent efficiently.
Tableau received $5 million in Series A funding a year into operation, then claimed $10 million in Series B capital four years later.
4. Keep passengers in the loop.
If you already have investors, be straightforward with them about your situation. This helps you maintain a healthy relationship with your backers, who may also offer alternate means of short-term funding to help you weather the storm.
Surprisingly enough, a similar situation launched Starbucks’ success. In 1971, a trio of academics invested their money into Starbucks Coffee, Tea, and Spice, opening a store in downtown Seattle that focused on teaching customers how to grind coffee beans to brew at home. It wasn’t until the early 1980s that Howard Schultz entered the picture and persuaded the founding partners to adopt the current business model.
The importance of stretching your money can’t be overemphasized. While most companies struggle with managing finances, we’ve seen many succeed. All those companies had leaders who made smart operational decisions and used all their available options by getting the most out of their dollars.
Learn to stretch every dollar your startup possesses. It could be just what it needs to cruise down the homestretch to viability.