Working with the founders of many large annual revenue-generating (over $80 million) or only funded but not revenue-generating startups, as well as many at the pre-product stage, I've discovered that founders frequently overlook three major cash or finance related problems and that ignoring even one of them puts the company at risk of failing.
Money is, at its core, a measure of a company's options.
When there is no money, the company has few, but all bad, options.
Things only get worse as the startup gets older or further along in its stages, as evidenced by the numerous down-rounds in 2023.
To avoid them, founders must be skilled with money.
Three common money mistakes made by founders that kill startups are listed below as a good place to start building knowledge and skills.
Overspending in general, being distracted by cash in a bank account, or working on unnecessary overspending ideas with no return while ignoring the company's unit economics and growth
As was just mentioned, when new businesses don't yet have their key numbers clarified, things can get cloudy and mostly dark for them.
Because the costs of building a revenue-generating and profitable business are unpredictable, startup founders and business owners must keep their attention focused on maintaining low burn rates through expense controls.
The fact that running out of money is the most common reason for the failure of a startup reflects the truth that some founders are not doing a good job of managing their company's cash flow or making enough money.
Mistakes in expenses and burn rates are especially common among first-time founders, who struggle to understand the big picture of money and how it should be managed.
After getting money from investors or making their first few sales, first-time founders who aren't very experienced can get carried away with the money in the company's bank account and spend too much on things like high-priced office space, unnecessary items, or Google-style perks.
Some of them simply waste an excessive amount of time on spending because they have recently adopted the mentality of "I can spend" and because doing so makes them feel better about themselves.
When current cash or income levels satisfy founders, they may lose focus or determination. The founder settles into his or her comfort zone and refuses to grow beyond the current state. This is where shareholders begin to lose money.
Founders should spend 99% of their time and energy on building a good product, selling it, hiring people and managing them, building a network, and learning crucially important information for the business journey. Rest is a waste or misapplication of time.
The first rule of being a founder, and your primary focus, should be to keep your startup from running out of money. The second rule should be to first get paid by customers, then pay your bills, and then spend only when absolutely necessary by using what is left. By not forgetting these two rules, your company can have a healthy way of spending money and increased chances of survival.
Lack of focus on revenue, sales, and financial goals
The third major cash or finance problem that founders often overlook but that can make it easy for a company to fail is a lack of focus on revenue and financial goals.
A lot of startups try to make a really good product in a time frame that is longer than it should be.
They run out of money because they don't make any money or make only a small amount while working on the product for too long. Sometimes they are most likely attempting to make their first sales as they get closer to the release of their product; sometimes they are making a few sales but can't grow much are some of the excuses founders commonly use. Then they die.
Making money is a vital part of any business. Your company requires revenue to survive.
As a result, it is critical that you understand the value of revenue in the same way that you understand the value of money and cash.
"Revenue" refers to the total amount of money generated by selling goods or services to customers.
After getting a million dollars in funding, many startups fail because they can't make any money, enough money, or money that keeps growing to stay alive.
The ability of a new company to sell its goods or services is the single most important factor in determining whether or not it will be successful.
Even if the owners or founders of a company put too much emphasis on other important parts of the business, like making a high-quality product, growing their network, and learning important information for the company's future, but don't pay attention to sales or can't make sales, the company is still doomed to fail.
A business's primary goal should be to generate revenue, because a business cannot exist without it. Sustaining and growing it can come second and third.
Income is the company's lifeblood, so its importance should be front and center in the minds of the founders or owners.
If you don’t find a way to make money, your company will die.
Many startups fail when there is a great product but this factor does not ensure the company's success, when in reality, this cannot happen unless sales are relatively simple.
The fourth factor to consider, after the characteristics of the company's founders, the market, and the competition, is whether or not the startup company is able to make revenue.
This is something that I like to do when I'm evaluating a business from the perspective of an investor or a shareholder.
Because avoiding wasteful expenditures of either time or money is a top priority, I naturally avoid businesses where making money is difficult.
Based on my experience sitting on all sides of the table, as an angel investor or in a role at a VC, and as a potential co-founder/partner candidate for a startup, if making sales or revenue is difficult, the risk of failing is higher for everyone. Founders, shareholders, investors, and employees are all at risk without exception.
And if the company is making money, my next questions are: How does revenue grow from month to month? Which acquisition channels were used to acquire customers? What are the acquisition costs? Has the company lost any customers so far, how many, and why?
The primary metric in some businesses may be something other than revenue. Some good examples include the number of active users and the amount of time they spend with the product, as well as the creation of a revolutionary product itself (cure for cancer or AI self managing it self). In these cases, revenue or monetization may occur years after the product is completed (as in SpaceX or Tesla), or after years of demonstrating that the product provides 100% benefit to its users and poses no risks (as in pharmaceutical companies), or as the number of users grows and accumulates, and early customer experience is critical to protect retention (as in social media companies-Snapchat).
However, these are only a few, like social media or gaming, biotech, real AI or relevant technology, and drug companies, until the product build, product-market fit, product-monetization, and scaling stages find clarity based on different proof factors and goals based on the nature of the product, market, and industry.
For the rest, founders and investors should prioritize revenue (sales), ease of revenue generation, and revenue growth.
If founders don't think about sales and revenue early on, before deciding on a business idea, they won't be able to figure out how the company's business plan should work in different departments to make the product, raise money, find the best team members, choose the most compatible co-founders, and use resources efficiently at the right time.
If founders do not consider how to make money carefully from the start, they may end up with a poor business and revenue model, pricing model, or planning model, or they may struggle to present the right product to a market, create marketing or sales funnels through the appropriate channels, raise money from investors again, or make reliable financial forecasts.
Everything your company does in all departments, as well as everything you do as a founder, will eventually lead to the point where you are attempting to sell your product or service. While this is the moment of truth, the outcome does not always make people happy. Because if you can't sell, all of your efforts are worthless.
Not knowing what to do with money
Many startup founders don't know what to do with their money or funds.
While it is obvious that the founder's duty is to build a large company, and how to do so can be described in theory as building a great product or service, leveraging technology to build faster and serve more customers, and selling to make revenue, attempting to do all of these things raises many complex questions that are difficult to answer.
Allocation of money at a company's bank account to the right strategies and operations is one of the biggest mysteries for any startup.
Founders find it difficult to how to manage money, allocate it, and evaluate its best way to be used.
When you have a high-quality product that customers are paying for and your financial statement reveals that your revenue exceeds your costs, signalling that you are profitable, deciding what to do or where to spend becomes easier.
You may choose to invest more in the product through quantity or quality approaches to increase the revenue generated by each consumer.
You can also increase your revenue by investing in revenue-generating marketing and sales channels.
You can invest in both product and marketing and sales, which is the most sensible decision if both offer higher revenues and profits.
Hiring more employees and investing in human resources will be unavoidable for a growing business.
In theory, everything said above is correct. However, the facts show that profitable businesses with paying consumers and high-quality products do not always grow or become billion-dollar companies. Why? The answer to this question is undoubtedly worth billions of dollars.
Things are considerably more difficult when your startup is at an early stage, such as ideation or creating an MVP, because you have less proof and more stuff to learn and discover.
How many people are required to build an MVP? What should these people's skill set and level of competence be? What should the MVP be for the problem you're attempting to solve? What characteristics does your product require? How will you find your first users or customers? How much money or time will you put into finding them? Which marketing and sales channels should be tried first? What resources will be required to conduct initial marketing tests? How long should you devote to developing a product if you are not making any money?
There are several complex questions that have no obvious answer yet can cost varying sums of money.
At this point, the founder has several ideas for how to spend the money, but none of them are obvious or highly accurate.
If you ask successful startup owners who have built billion-dollar companies how they turned a concept into a billion-dollar company one of the most common answers you will get is that determining what is right demands a lot of testing.
Being fast becomes important here because tests consume time and, indirectly or directly, money, and you only have a limited supply of either.
Startup companies can have both significant strengths and severe weaknesses.
Management's inability in financial matters is one of the most serious warning signs (weaknesses) that can significantly increase your risk and accelerate your startup's failure.