How to Avoid the #1 Preventable Cause of Startup Failure


This column is by Sujan Patel, Co-Founder, webprofits & ContentMarketer

Without a doubt, the number one reason that startups fail is lack of capital. Not having money to effectively launch and maintain a business is a deathblow to any startup.

In order to be successful, you need to have the funds to launch, but also the funds to carry you through until the business is sustaining itself.

Anything less than that simply won’t work. It’s like trying to fly a plane that’s missing a few parts: it might get you off the ground, but how long can that aircraft sustain flight when you don’t have everything you need to keep it in the air?

Not having enough money to operate a business isn’t something that happens by accident. It’s the result of poor planning or bad decision making. Thankfully, that also means that it’s 100% preventable.

Always Build From a Strong Business Plan

Whether you’re raising seed funding for your business or you’re bootstrapping, spending the time to research and build a better business plan with appropriate forecasting will save you money — and will likely save your business.

Too many startups try to launch with only a mocked-up idea or strategy, or no plan at all. This doesn’t provide any insight into startup and operational costs, marketing expenses, labor, etc. You’re left to guess how much you need to operate.

Of course, a business plan isn’t 100% foolproof. You’ll still have to adjust and adapt, and even guess along the way.

“You will always be forced to make a decision without understanding what is coming,” says Aaron O’Hearn, CEO of Startup Institute. “As a founder, that is just something you have to get comfortable with.”

Even so, knowing where you’re going — and having the money to get there — is not optional.

Once your business plan is complete, there will be lots of opportunities to start spending your money. It’s critical that you know what you should spend money on — and what you shouldn’t.

Where Your Money Should Go

1. Market Research

You shouldn’t spend a dime on production before you know that you have customers who are ready to buy your product. Otherwise, you’ll spend a significant sum of your funds creating a product that may completely flop once you release it.

Research is often done early as part of your business plan, but it’s not a one-off task. Research should be a regular part of your growth process. This is the only to way to stay on top of market trends and what your customers want.

2. A CFO or Accountant

Having a skilled person to manage your finances can save you more money that you realize. They can hold you accountable for spending and help you better plan where your money goes. Hiring an accountant or CFO is one of the best investments to ensure that your business doesn’t run out of money because of improper spending.

“As an investor at a large VC firm, I meet many founders who don’t have a great handle on their numbers,” says Jeff Richards, partner at GGV Capital. “It doesn’t usually hurt the company early, but it can be a major weak point when raising capital and can sometimes even kill a company down the road.”

3. Marketing

Marketing can be done extremely well, and it can be done extremely poorly. In both cases, you can dramatically overspend if you’re not careful. You absolutely should spend money on marketing, but don’t try to manage it on your own.

Hire a professional to join your team or outsource to a respected and trusted agency that can help you create a strong, affordable marketing strategy that fits your business.

Don’t just throw money at things because a competitor or major brand is doing it.

Most importantly, you want to make sure that content promotion is always a part of your marketing strategy.

“Ignore the hype you see about other startups in the press… half of them will be dead in a year,” says Jules Pieri, Co-founder of The Grommet. “Focus on building your business so you can be the one left standing.”

4. Manage Your Subscription Services

There are a ton of SaaS platforms out there designed to make running a business easier. That includes promotional tools, content marketing platforms, CRM software, project management, office tools, creative tools, and more.

You can monthly-fee yourself to death if you’re not careful. If there’s a free or low-cost option with any subscription that you truly need, then use it until you’re absolutely sure you need to upgrade to a more costly solution or plan.

5. Hold Off on Expansion

Don’t let early successes make you think that expansion is automatically a smart move. Expanding to a new office, a new geographic location, adding more space, or renovating too soon isn’t something you do on a whim.

It can send you right back to square one — and it’s not a one-time cost. Expansion of any kind ads permanent overhead costs from added infrastructure.

It’s tragic when a company that has a great deal of potential expands suddenly, stretching their logistic capabilities and increasing overhead beyond what they can manage.

6. Invest in Technical Support

Not spending money can sometimes be better than even controlled, strategic spending. Sometimes.

In the case of technical support, don’t try to manage it on your own. Like trying to manage your own books, your time is better spent serving your customers and running your business.

While hiring technical support to manage your network or website has a cost, you can likely earn a greater return on your time by working on your business rather than on network, hardware, or site issues.

7. Don’t Spend on Fancy Things

Trying to upgrade your office or equipment can quickly drain your cash reserves. Sure, everyone wants a plush office, but the expense involved in creating that perfect workspace can quickly overwhelm you.

The same can be said for high-end computers and tech gadgets.

Any time you’re faced with opportunities to spend on these kinds of luxuries, take the time ask yourself what value it brings to your business. Will better furniture or high-end gadgets directly contribute to revenue generation?

If not, put that money into areas that can. The luxuries can wait.

8. Networking is Important; Expensive Trips Are Not

Networking is a critical part of growing your business, landing clients, and meeting vendors. Traveling to an industry show might be what you need to make your business take off if you meet the right contact.

But it can be done without flying first class, renting an expensive car, and staying at a 5-star hotel.

If you must travel for business, then do it economically. You don’t want your networking efforts and travel to be the cause for not having enough in the bank to cover your next production run.

Be Strategic

Startups often fall into the trap of spending too much money on things that aren’t important — and that’s just one of the many mistakes that can lead to failure.

If you approach your business launch strategically, and you’re careful about how you manage your funds while you grow your small business, you could be one of the few who avoid failure due to lack of funds.

Disclaimer: This is a curated post. The statements, opinions and data contained in these publications are solely those of the individual authors and contributors and not of iamwire and the editor(s). This article was initially published here.

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Image Credit: Jobsought

  • Flower Gift Korea

    Great article, but it’s tough for small startups to have enough capital when starting.