You will make these Financial Mistakes in your Startup and you can most certainly avoid them.
The idea of Google, brain child of Larry page and Sergey Brin was once too a Start-Up, incorporated in their friends garage in Menlo Park, California, with USD 600K of angel investments in 1998 from the likes of Andy Bechtolsheim, Jeff Bezos and Co. Their growth has been phenomenal and to the outside world, it might have been a well-oiled machine bringing search technology, operations, legal, human resources together but from within, it would have been at sixes and sevens during its initial day’s.
Fast forward to today, these problems have not disappeared but given the amount of resources, these issues can be effectively tackled instead of the Founders, who love to micro-manage take on everything by themselves. Having great co-founders and a team filling in different roles, experienced venture investors and directors on the startup board can greatly help alleviate the initial struggle and provide a network to sustainably scale up the business, don't underestimate the help they can offer. Most of the tech businesses these days are founded by engineers, and frankly engineers may be great at managing the technical stack and scaling the service or the product, managing the finances of the business is entirely another ball game.
“If you are going to be in business, you must learn about money: how it works, how it flows, and how to put it to work for you.” ― Idowu Koyenikan, Wealth for All: Living a Life of Success at the Edge of Your Ability
Founders naturally want to devote all their time and energy towards the development of their business and in doing so, they try to manage every aspect of the business which often backfires in terms of time and energy. Leveraging on the expertise of external firms and consultants or hiring a CFO can greatly help navigate the financial waters and prevent unnecessary problems. These are some of the financial mistakes I have come across that can be avoided and hopefully can provide some value and insights to the future entrepreneurs: -
- Valuation of the business
When it comes to the valuation of the business, many founders and investors will be divided over the valuation of a private business. Should the company by valued based on Comparable Company Analysis (CCA) or the Discounted Cashflow Method (DCF) or the First Chicago Method (FCF) which is a combination of the multiple-based valuation method and the discounted cashflow method. Knowing this is important so that you know exactly how much you need, not more, not less, exactly how much you need to scale the business. If you ask for USD 800K, but end up giving away 50% of the business, is it sustainable for further rounds of funding?
2. Equity Split between the Co-Founders
Equity is a sensitive subject for many co-founders. It may be the bone of contention between the Co-Founders if not split appropriately. Sometimes a co-founder comes up with the idea and the other one might come-up with the capital or the solution, often drawing minimal salary and all of this can play into how equity should be split. I find this equity split calculator as an invaluable reference to deal with this paramount question.
3. Miscalculation of the burn-rate
A very well know result is that companies burning too much money will be more likely to fail. Spending lavishly on swanky office spaces with huge monthly rentals, covering the salary and medical insurance of a head count of 5-6 employees, taxes, recurring fees, transport etc you are already looking at USD 500K of expense for a year. Co-Founders also need to pay themselves. You cant work at peak if you are starving yourself off and there isn't enough money to cover the base expenses too.
4. Not providing ESOPS to early employees EARLY
To retain talent, ESOPS can be a great way of motivating and keeping talent for a few years. Ensuring appropriate vesting periods for employees can keep the churn rate low, providing a solid foundation to scale the service or product.
5. Mispricing the Product or Service
Price your product or service to high or too low and you will be facing stiff competition. Boutique firms can offer services and products that can match the quality of work that more established companies can, so where does the price point of your service or product fit? Suiting the pricing n the market will make your product prosper in the targeted locality.
6. Not Hiring a Finance Professional to navigate the Startup
You are now set to start a new business in the market after keeping all the above points in mind. Now you will think that now I am self sufficient to make my own strategies to take my company to a new height. So if you're a CEO or a CTO thinking you can manage the role’s of a CFO, this is what the CFO brings to the table: -
Managing the direction of the finance and the accounting team, providing strategic long term forecasts, budget planning, financial reporting, commercial insights for products and services, risk and compliance, corrective actions to navigate the firm during turbulent times.
Alternatively, hiring a professional will lead you to the right way of financing and at least you will need them for keeping day-to-day accounting and book keeping.
7. Ignoring government funding and tax-breaks for startups.
A lot of governments can provide tax-breaks to startups for almost 3 years or cover the cost of office rental expenses or provide subsidies on employee income. These missed opportunities can be quite costly. They present an amazing opportunity to leverage some of the early expenses in exchange for almost nothing.
If you wish to discuss any more points or have any thoughts an ideas, do feel free to reach out in the comments and I would be happy to discuss in detail.
