Most of us are aware of the fact that many startups fail. However, we don’t go the next step and analyze the reasons behind such failures. There are many critical issues in the startup process, which if ignored, will almost certainly guarantee the demise of a startup.
Although it should go without saying that the monitoring and forecasting of cash flow is critical, it’s amazing to me that so many startups fail to closely monitor and properly project their cash flow.
Too often management is overly optimistic when forecasting the timing of new revenues and inflow of new capital. An in-house accountant/CFO is indispensable to this process. Management must always seriously consider all of the input from its financial people.
In management’s haste to get their new product to market there are many instances when it is released too soon. Rather than hasten the inflow of cash, an abortive market rollout merely compounds cash flow problems and destroys the confidence of consumers in the product. Therefore, it is absolutely critical for management to fully vet a product before it is released to consumers.
Many failed startups were unrealistic when it came to predicting the market segment that their product would attract and the share of that market that they would garner.
Besides focusing on a realistic market that will be targeted, many executives fail to predict when their product will successfully enter that market and how much of the market share their product will achieve.
The result of market miscalculations is a steady drain on the company’s cash flow and an increase in its burn rate, followed by panicky calls to investment bankers or venture capitalists for additional money. This is a clear signal to investors that management has missed the boat when it comes to realistic projections and that it might be time for the investors to “cut bait” with the company.
Some of us, though we might consider ourselves to be great entrepreneurs, are not good at day-to-day management. That’s best left to a professional manager who is “slow and steady” and who can handle the daily repetitive tasks that all good management requires.
It takes a realistic and humble entrepreneur to know when to step back and leave the daily management tasks to someone who is less mercurial and more evenhanded and balanced.
Board of Directors
A good, proactive board of directors is critical to the ultimate success of an organization. A balanced board will include management, marketing, financial and industry representation, as well as the presence of the founders and investors.
A balanced board will inevitably have disagreements. Not only are these to be expected, but also they are really, in my opinion, quite necessary. This “friction” among board members, if done professionally, will inevitably create balanced and well thought-out decisions.
A previous article, Choosing Your Board of Directors, goes into detail on the composition, duties and size of an effective board. Having a great board can make all the difference between the success and failure of your company.
It is amazing how many businesses are started not only without a great business plan, but with no business plan at all. You must commit to writing a clear and accurate story of what your company is about, where you want to go with it, and how you will get there.
These are the basic elements of a plan — and, it needn’t be that complicated. My article A Great Business Plan: The Key to Raising Capital will walk you through the process of creating a plan that will go a long way to insuring the future success of your business. Also, it will aid you in attracting much-needed capital for your company.
Finally, I must recommend a book that looks at successful startups in a clinical fashion. It’s called Startups That Work, by Joel Kurtzman and Glenn Rifkin. The book is a study of why startups work. An executive friend of mine who is quoted in the book recommended it to me. I told him that the book really changed the way I look at starting and running a business. I had been too dependent on visceral feelings and instinctive judgments. I will now look at new ventures in a more cerebral fashion.
Successful startups make invaluable contributions to the U.S. economy. We can’t continue to grow and flourish without them. A well thought-out and well-planned startup puts you on the road to success.
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].