Startup. A startup is a venture that is initiated by its founders around an idea or a problem with a potential for significant business opportunity and impact. Often the actual development starts even before that with a search of an idea or a meaningful problem worth solving and building a committed founding team aligned with a shared vision to make that vision into reality.
That beautiful, mesmerising idea once formalised needs the expertise and skills to transform into a profitable business. With that view as a startup grows one of the fundamental focus areas becomes financial management.
A survey by the IBM Institute for Business Value and Oxford Economics reveals that 90 % of startups fail within the first 5 years. Why would that happen and more so why to that vast majority of the startup community? While there could be a plethora of reasons that contribute to the meltdowns but one core area that leads to the premature closure of that wonderful dream to make an impact is the lack of financial management.
This lack of financial management is a focus area where a lot of startup founders stumble primarily because of the innate lack of understanding about finance and the general lack of financial literacy surrounding startup finance. While personal finance deals with avenues of investment, retirement planning, taxation, insurances and estate planning the world of startup finance is a tad bit different. While some avenues like taxation are essential for both communities, the different focus areas within startup finance start from the incorporation to the scaling up of that startup into a scaled-up venture.
In the mad rush to “raise” money what a lot of startup founders do not understand and avoid understanding is the core concept of liquidity. This implies that irrespective of what we’re running after how much of it is really reflected in the accounting and banking statements that the business is building upon. A fundamental avenue to reiterate time and again for any startup founder is the fact that it is as important to building a product that speaks for itself as it is to pursue different fundraising avenues. A product that tells a story and makes an impact.
For people learning about startup finance for the first time, there are two ways in which a startup can function. A: Being Bootstrapped – A common term for companies choosing to keep ownership with themselves and building a profitable business over time and B: Fundraising through Venture Capital – A super popular approach that opens up avenues for a Private Limited company to raise money by inviting an external investor with the monetary reserves to invest in the company in exchange for equity or ownership in that company. Within the fundraising process, there are various rounds through which a company can raise money and the timelines for these vary from one company to the other.
Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many different factors, including management, proven track record, market size and risk. These rounds start from the pre-seed or the earliest stage of funding for a venture to the seed or the angel round and this continues as a series which is known as Series A, B, C and so on depending on the stage of the venture, the need to raise money to scale up and the desire to ultimately go to IPO or the Initial Public Offering where you now open your venture to public investors.
However, just rushing through these steps and not having a detailed understanding of finance can often set the business to close sooner than anticipated. While startup founders have brilliant ideas, often the pressure that the startup world brings with itself narrows the vision to only understand the immediate problems at hand and ignore the financial understanding of your own business.
To reiterate the importance of the same, we list down the top 10 financial tips for a startup entrepreneur:
- Take the time out to understand your Cash Flow Statement. Remember a business is only profitable when Cash In > Cash out.
- Budget and plan your expenses. Overindulging in avenues that are leading to a loss of time, effort and cash flow needs reassessment.
- Estimate your Startup Runway. For any business, a Runway is the timeframe that you have till the reserves in your account run dry. Plan and visualise a strategy that maps your growth to your funding requirements.
- While Term Sheets can be overwhelming, they’re a must to understand if you’re raising money from an external investor.
- Understanding your Cash Burn Rate. This will help you understand how quickly you may be losing money and can catch you off-guard if you do not plan ahead.
- Remember, the Customer is king. No business can survive merely on venture capital or pooled money if there are no paying customers or people do not embrace your product. Take in frequent feedbacks and make modifications to make your product or service more versatile and flexible.
- Financial Management needs patience. Rushing through a deal just because you want to close it may not be the best strategy.
- Often spoken but lesser heard: Raising money is ideal when you can forecast and do not desperately need it.
- Evaluate whether it’s time to make a bit of a shift ( Pivot) or it would be perfect to keep going (Persevere). An idealogy I learnt while working at a prior organisation but something I’d want to keep reiterating for life.
- Building a Long Term Profitable Venture is the ideal way to help bring a startup to a full-fledged company. Focus on your stakeholders and the people who matter and invest in those right resources.
While these are not exhaustive, the best way to adapt is to just open your mind to embrace the finance that surrounds your venture. Sure, it looks scary initially, but it can be the best way to make your venture sustainable for the long run. Reach out and connect with your own community to help you to navigate the world of finance and if you try just a little bit, it will open up a zillion opportunities to succeed.
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