So, you’ve got a great business idea and have been able to build a prototype that validates it. With an innovative product at hand and promising financial projections, you’re able to secure funding from investors who believe in you and are keen to back your startup. You might assume that the worst is over now and your startup is only going to experience an upward trajectory. This couldn’t be further from the truth.
Quibi, the short-video streaming app company, sought to revolutionise the way people consume content and brought some of Hollywood’s biggest names onboard, only to shut down, having dissipated nearly $1.75 billion, a mere six months after its highly publicised debut. WeWork made the world see a future where office space could be entirely communal and had behemoths like SoftBank calling it the “next Alibaba” in their portfolio. The rest is history.
Regardless of how groundbreaking and promising the product or service may be, how ingenious the founder and highly bankrolled the business may be, any startup can fall prey to costly mistakes. There are several measures that startups can take to avoid getting carried away and wasting their investment money.
Countless ideas and inventions may seem brilliant on paper but will never truly take off if there isn’t adequate demand. In 42% of cases, misreading market demand was the top reason why startups fail. It is crucial to identify the right market, gauge the level of demand, people’s willingness to pay and be mindful of consumer psychology when developing your product. Tata Motors launched their Nano car, with great fanfare, dubbing it the “people’s car”. Fire safety problems, production delays, self-set pre-launch expectations, and marketing gaffes caused by completely misreading middle-class aspirations were among the main reasons why they were unable to meet targets or rebrand effectively. Perhaps their most embarrassing misstep yet, Tata incurred heavy losses throughout, finally halting production.
Even big companies can make serious mistakes but conglomerates like the Tata Group might be able to withstand losses and can still recover easily, as opposed to a startup. Without an ideal product-market fit, no amount of money poured into marketing and advertising will help. It is necessary to conduct smoke tests, create minimum viable products and effectively target the right audience, to avoid burning through money and try to change course later on.
Don’t be penny wise and pound foolish
When looking to save money, buying the cheapest option may seem like the best option. However, this might not always be the case and your purchase might end up being expensive in the long run. For instance, business software can be built in many different ways, making some software options cheaper than others. However, when you make changes to your business structure as you grow, this will end up being costlier than if you had chosen the more customizable, long-term option. This applies to your hiring picks as well. Make feasible business decisions and always think of the long-term ramifications over short-term savings.
The right team
In addition to the fact that employee expenses represent a substantial portion of overall costs, your team will often influence how successful your startup will be. Hiring excessively or too few people, or worse, hiring the wrong people could spell disaster even for the most promising startups. Your hiring targets should be based on actual demand and should include only those individuals who have the necessary skills and capabilities to add value to your business. This also applies when you are considering bringing external advisors onboard to guide you. Learn to see through the fluff and pick the person who is the most optimal fit for your organisation and can provide you with unembellished, genuine counsel. You will be able to develop your organisation’s core competencies only when your HR practices include onboarding the most qualified people for the roles that need to be filled.
Cost-efficient financial practices
The prevalence of VC financing has made it considerably easier to receive funding. This can albeit lead to a shocking lack of oversight regarding a startup’s financial health. There
have been instances where startups have been propped up as unicorns, due to the numerous cash infusions they receive, regardless of whether their business model is truly profitable. You need a competent accountant to check if you are spending money in the right places and set up a winning tax planning framework. This is why it is important to invest in a good accounting and finance team and use modern accounting tools to ensure that your business is actually sustainable.
Measurable marketing activities
Finding an ideal product-market fit and acquiring customers will be the most significant challenge for any new startup. In trying to build awareness, it is easy to overspend on marketing activities and end up straining your overall budget. In this digital age, splashing out on digital ads and freebies to build awareness about your brand may seem like a standard aspect of any marketing strategy but the returns are especially when your startup is still a fledgling business. It would be prudent to encourage financial accountability and transparency by documenting all expenses and eliminating unwarranted expenditures.
Don’t try to scale prematurely
As you gain traction in the market and meet your initial targets, the most logical step to take would be to go into expansion mode. However, this could put your startup in a precarious position because the more you grow, the bigger your problems will become, making them that much more difficult to correct. Hiring people who will be underutilised, buying up extra office space or production facilities before you even have enough demand will deplete your finances, sometimes irreversibly. Several startups who scale too early incur so much debt that they are rarely able to pay it off, forcing them to shut down. It is wise to wait and expand according to genuine demand, instead of hoping there will be sufficient demand to sustain the huge amounts of money being spent.