Why Startups Can Fail
Vancouver and Toronto were recently ranked 15th and 16th as the best cities to start a new company. The ecosystems are prime for business growth, but many startups remain just that: they fail to grow into full-fledged, successful businesses, having stumbled into one of the many traps that startups can fall into.
There are many reasons why some startups succeed, and others just don’t! Having a brilliant idea is not enough! Here are some common mistakes that startups make and how to avoid them.
This post looks at what startup founders should consider after successfully raising the money to get their company off the ground. It follows our guide on fundraising for startups. Our third installment in this series on bookkeeping for startups provides guidance on accounting advice and best practices for startups.
The Inability to Pivot
When you start a new business, you start with a particular problem you hope to solve for your future clients. However, it’s important to remain adaptable. If your initial plan isn’t working, it may be time to look at opportunities to pivot.
Let’s say you started out marketing a service to millennials. The need/demand is there, but you must price in line with what your customers are willing to spend to make money. Many companies fail to recognize this and simply keep trying, pouring money into marketing and advertising. Smarter business owners will see the value in pivoting—perhaps the cost of altering your brand’s image to appeal to a different generation.
Listen to your customers, listen to your market, and listen to your finances. You’ll find your answers!
Not Structuring for Growth
Structuring your business for long-term success and growth means speaking to experts early in the process. Talk to a tax planner or business advisor before you make decisions that could hurt you in the long run. For example, many entrepreneurs will rush to incorporate, but there are circumstances where postponing incorporation can be a better financial decision.
Not Understanding Your Cost of Acquisition
If your business solves a problem you know your consumers have, it can be tempting to assume that people will readily and immediately adopt your service. However, attracting and retaining customers can be expensive, so pay careful attention to your acquisition cost versus a client's lifetime value. Here is an LTV calculator to help you with this decision:
Developing strategic business and marketing plans is crucial to understanding your true cost of acquisition. Paying attention to your financials every step of the way is important to every element of your business’ success. Here is a CAC calculator:
Early on, you should capture as much financial data as possible through good bookkeeping. In the long run, this data could become very valuable for decision-making.
Having High Overhead Costs
When a small business is experiencing its first wave of success, it’s important to start investing back into the business. Deciding what to invest your money in can make or break your business.
Startups, particularly in the tech industry, are known for having flashy office spaces (we all know the cliche - the trendy warehouse space, the ping-pong table, the bean bag chairs). While rapid growth will require functional office space for employees and meetings, some startups invest far too much in this. Ultimately, rent is an overhead cost that takes away investment dollars for other, potentially more lucrative investment opportunities.
So, where should you invest? Well, that will be unique to each company. However, the strength of your business will always come down to investing in your process, your people, and your product.
Burn Out
When you’re passionate about your startup, you will invest significant time, energy, and money into its success.
Invest in employees that you can trust to manage elements of your business. Rely on trusted business advisors for advice. Outsource the elements of your job that you can’t do or don’t enjoy doing. The cost of paying for these services will free up your time to focus on what you love and need to do, plus it will prevent you from burning out by taking on too much unnecessary stress and work.
Ignoring the Numbers
Entrepreneurs often rely on year-end accounting rather than monthly bookkeeping, thinking they’re saving money. But without accurate monthly financial tracking and data, you can miss out on valuable financial data that will help project your overall costs and cash flow.
Outsourced bookkeeping and cloud-based accounting programs are cost-effective solutions to startup financial challenges. Ensuring an expert reconciles your financials monthly will help you keep your finger on the pulse without investing significant administrative time.
With integrated analytics programs, your monthly financial records can help spot problem areas or opportunities early on. Better yet, your financial data provides sound evidence to investors looking to invest in a company with proven growth opportunities.
15 Must-Track Metrics & KPIs for Nonprofit Success
Do's and Don'ts After Raising Startup Capital
Knowing what to do after raising startup capital—and what not to do—can mean the difference between building a great company and running out of cash.
This essential list of post-funding “do’s” and “don’ts” will help you focus on what’s truly mission-critical so you can reach profitability as quickly as possible.
What to do after raising startup capital
DO focus on proving product-market fit. After raising funding, doing your due diligence to prove you’re targeting the right audience can prevent you from wasting money on product features users don’t want or need and marketing activities aimed at the wrong people.
Look for these signs to help confirm product-market fit.
Exponential organic growth. Your main growth metric should be doubling over equal time intervals (monthly, for example).
VIP adoption. Having big or recognizable companies using your software demonstrates product-user fit, an excellent indication of product-market fit.
Customer retention. Retention can be a valuable indicator of fit when coupled with metrics showing meaningful usage and growth.
DO use OKRs to set goals. OKRs (objectives and key results) help SaaS startups focus on goals by breaking them down into measurable criteria that track achievement.
Using OKRs to align goals and targets across your company is important for:
- Boosting brand awareness
- Increasing customer subscriptions
- Establishing or expanding a funding network
Once you’ve defined your OKRs, don't forget to create specific tasks to achieve them and assign initiatives to team members.
DO hire the right roles early on. While early-stage founders commonly wear multiple hats, your plan for what to do after raising startup capital should include hiring multi-talented team members to fill talent gaps—and free you to focus on other priorities.
Key roles to hire include:
- A marketing expert to ensure your vision reaches a wide audience
- A talented salesperson to help grow your revenue
- A technical hire who specializes in technology and development
If you lack sufficient funds to support the hiring process, outsourcing non-core functions like HR and accounting will help you access proven third-party expertise while keeping costs down.
DO create a budget to allocate spending. Creating a quarterly or annual budget that breaks down expected revenue and expenses by month is essential for optimizing venture capital spend, improving cash flow, and keeping your startup afloat long enough to reach profitability.
Make sure you:
- Identify top priorities and create your budget around them
- Include some padding for initiatives that cost more than expected
- Funnel excess funds from other initiatives into spending areas that are paying off quantifiably
Using your budget as a financial model to monitor performance will help you meet financial commitments, manage long-term costs effectively, and plan adequately for revenue fluctuations.
DO keep your bookkeeping up to date. Keeping your books current is essential for making smarter business and budget decisions. By investing in a cloud-based bookkeeping solution or part-time bookkeeper, you can:
- Gain clear visibility into your revenue and expenses
- See where money in the bank is going daily, weekly, monthly, and quarterly
- Use historical financial data to build cash flow forecasts
Outsourcing your bookkeeping is a great way to save time and money while eliminating the worry of building your own processes or managing your day-to-day numbers.
What not to do after raising startup capital
DON’T use funds too quickly or slowly. After raising money, venture capitalists and other investors will want to know how you’re spending their funds.
- You may have to raise an emergency round if you deplete funds too quickly. This can erode your success prospects and lead to unfavourable investor, partner, and employee relations.
- If you’re too conservative with funds, you may struggle to achieve the growth needed to impress lead investors. This can ruin your chances of securing future funding.
Your best course of action when determining what to do after raising startup capital is to realistically align goals with spending, track expenses as they occur, and aim to spend less than 10% of your capital raise monthly.
DON’T overspend or underspend. There’s a fine line between overspending and underspending.
- Your startup could be overspending—and on a fast track to running out of funds—simply by purchasing Salesforce when you only need HubSpot, or hiring a CFO when all you need is a solid bookkeeper.
- Being overly frugal, on the other hand—by refusing to make a critical hire or consistently adopting cheaper processes—can consume valuable time and damage your product or company image.
Since both overspending and underspending can undermine critical growth, it’s best to create a detailed spending plan, complete with milestones and workback schedules.
DON’T spend without structure. The last thing your startup should do is spend money on initiatives likely to yield only marginal returns.
Here are some examples of oversights that could cost you:
- Running campaigns without being able to measure customer response through A/B testing
- Investing in sales before proving product-market fit
- Spending on ads or pitch decks without the infrastructure to nurture prospects
- Recruiting team members without any real plan for their daily work or training
The best way to avoid pitfalls like these is with a structured planning process that ensures you and your team think holistically before spending valuable dollars.
With your startup's future riding on how effectively you manage, spend, and save the funding you’ve raised, it's critical to establish the right priorities and processes as soon as possible.
What to Focus on When Hiring for Your Startup After Raising Funds
It’s not uncommon for early-stage startup founders to take on multiple roles and responsibilities. Having recently raised your first round of funding, however, it’s time to start recruiting more outside talent.
For some startups, this could include hiring a designer to liven up their website or a copywriter to engage incoming traffic. For others, it will mean gearing their recruiting effort toward sales or engineering personnel.
Since hiring top talent is one of the biggest costs your startup will encounter, it’s important that you avoid bringing on team members before you need them—or that you don’t need them at all.
This recruitment strategy overview will show you what to focus on when hiring for your startup, including which roles you should be looking to fill first and where you can comfortably outsource.
Identify mission-critical roles
The best way to launch your hiring process is to identify and recruit only mission-critical roles that fill talent gaps in your existing team.
A quality new hire is a healthy indicator of a developing startup culture and growing business. But onboarding too many job seekers too quickly can:
- Stretch your budget unnecessarily
- Lead to layoffs that erode company culture
- Necessitate the raising of additional funds
You should also be leery of filling the wrong roles upfront. If, for example, you immediately hire a CFO (chief financial officer) when all you need is a bookkeeper, you risk overspending and running out of cash.
By using your job postings to bring on multi-skilled, adaptable professionals—like the marketer who can do graphic design, for example, or the developer who also excels at product management—you’ll cover more ground while freeing yourself to handle other business priorities.
Focus on three key roles every startup needs. If you’re unsure what to focus on when hiring for your startup, start with these three key roles every new business needs.
1. Marketing
Because founders often focus on developing great products, it’s easy to undervalue the vital role marketing plays.
If your startup is ready to go to market, hiring an expert with excellent marketing and social media skills will help you:
- Express your value proposition clearly and persuasively
- Build brand awareness
- Generate long-term demand for your product
The right time to add a marketer to your team is when your go-to-market strategy is based on reaching a wide consumer audience.
If, for example, your startup sells trendy, inexpensive clothing to a global eCommerce market, it makes sense to hire a marketer who can interact with your online community and help maintain positive customer relationships.
Ideally, you should also look for a marketing professional who can collaborate with your product manager to incorporate customer feedback into product development.
2. Sales
Using your website’s careers pages to add a talented salesperson to your team is a great way to generate new leads that can grow your sales revenue—especially if that person has relevant industry experience and requires minimal training to start closing deals.
The right time to hire a salesperson is when your go-to-market strategy requires a more sales-focused approach, like targeting a niche market.
If, for example, your startup sells software specifically for the aviation industry, it makes sense to hire a salesperson who can help sell your product directly to airlines and provide them with ongoing customer support.
Hiring the right sales rep isn’t always easy. But as you work through what to focus on when hiring for your startup, remember that investing in the best possible sales team members will help generate income for additional hires.
3. Tech
Hiring team members specializing in technology and development is often crucial for business success, especially for tech startups.
The right time to make a tech hire a permanent part of your team is when you need to fill a development or IT skills gap to make your product viable.
Using job boards to source product engineers, website developers, and other tech personnel can improve your product and expand your web presence and reach.
Outsource non-core functions: Outsourcing certain job descriptions is a great option when your startup lacks the time or funds to hire in-house.
For example, outsourcing non-core functions to experienced freelancers can generate new connections while avoiding premature hiring commitments. Working with established companies also helps guarantee quality, expertise, and timeliness while keeping costs down.
Here are some non-core roles we recommend outsourcing:
- Accounting. When the time is right, third-party accountants can help you find tax deductions, file returns, and create financial forecasts to stay on top of your funding.
- Bookkeeping. Working with a cloud-based bookkeeper lets you track day-to-day spending, process invoices and payroll, and maintain your financial ledgers remotely.
- Writing & Documentation. Freelance content marketers, copywriters, editors, and business document specialists can be conveniently contracted as needed.
- HR/Recruiting. Outsourcing your recruitment process to a trusted agency reduces time spent screening high-level candidates and managing the interview process.
As you consider what to focus on when hiring for your startup, remember that filling key roles effectively should be your top priority since failing to hire the right people can severely undermine your growth.
In areas where hiring full-time help is premature or unnecessary, outsourcing can ensure you get the expertise you need without spending big bucks on permanent staff. Enkel can help. Contact us to find out more about outsourcing!
