Common Financial Mistakes Startups Need to Avoid
About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.
Let that sink in: Three out of four startups fail.
So how do you ensure that your startup won’t become just another statistic? You must have a clear understanding of your product, your customers and your path to monetization. Communication is key to making the right financial decisions.
Not Challenging Your Assumption
Making assumptions rather than taking the time to properly conduct research is a dangerous mistake. Research is necessary to understand the customer and the competition. It is necessary to price your product and ensure it will still be profitable as you scale. It’s necessary to determine how and where it will be produced, and whether you will reach customers through B2B or B2C. There’s a process that must be followed to create a successful business plan: Get an assumption, test it, analyze it, pivot and keep going. Challenge your assumptions. Talk to the customer.
Making Decisions in a Vacuum
Depending on the structure of your board, you may have to ask permission to spend more than, for example, $5,000. If you have no investors, make sure you have advisors who will push back until you can articulate why the money needs to be spent. Be prepared to present the pros and cons. The onus is on the founder to do that research and present your findings with total transparency.
Underestimating Your Runway and Burn Rate Raising money is a full-time job as you pitch investors and do due diligence. You must be realistic about raising the right amount of money and understanding how long it’s going to last you. It’s a common mistake to not raise enough money, or to be naïve about what you can accomplish with what you have raised. Some may raise a substantial amount but not have the capacity or sophistication to deploy it. What are the milestones you need to reach to get to the next tranche? The answers are unique to each startup.
Spending Money in the Wrong Places Some startups jump right into marketing so they can hand out merchandise to their friends. They’re doing it backwards. Most startups don’t yet have distribution channels, so a stronger brand won’t yet equate to stronger sales. The startup must also first develop a clear identity, so that when the time comes, you will market a strong brand identity.
Correcting a Financial Mistake
Surrounding yourself with good advisors will help you to catch and correct a financial mistake before it has gone too far. Especially when you are using investors’ money, you must tell the board as soon as possible what the mistake was, how you plan to solve it and how you can use the board’s assistance.
Remember, your board has invested in you. There should be a collaborative mentality. Band together and figure it out. You need to know they have your back.
How Scratchpad Accelerator Can Help
Scratchpad Accelerator’s role is to give advice, providing vital mentoring and training. Our goal is to provide constant contact and be your sounding board. We’re going to keep asking “Why?” and push back on your ideas. We provide the voice of reason, that outside perspective looking in.
As generalists, we don’t have all the answers. That’s why we have an amazing mentor network and can provide you with access to someone in the same position but with a decade of experience to share. At Scratchpad Accelerator, we remove those roadblocks to give you a fighting chance to beat the odds.