Start-up is not a cash-burning stage

The most common mistake the owners have made is treating the startup as a small version of a large established business 

It’s an exciting fact that the current world economies and industries are being restructured and the rules are being redefined by innovative startups. The need for frugal innovative efforts is being addressed by startups to create sharing, circular, and spiral economies. In the case of business, industries such as transportation, hospitality, healthcare, banking and finance, and many more industries are disrupted by world-class startups to create more value with fewer resources.

Though many successful startup case studies are under the spotlight, still flip side shows more than 90% of start-up fail within the first three years, and making the story further worse more than 10% die in the first year itself. Given the capabilities of startups to reshape, restructure, and even re-engineer an economy and industries, this key bitter fact deserves to be addressed and the concerned issues are being solved to prolong the life and optimise the value created by such businesses.

It’s surprising in an era of knowledge where extensive training and knowledge sharing taking place, with billions of investments, in startups and in particular in inventing successful startups, the failure rate is mounting up. In fact, this is what inspired me to, really, get down to the ground and find out exactly what is going wrong with startups destined to fail. 

As part of this mission found many key factors which determine the fate of the endeavour at the beginning stage itself, as a result of extensive research and interviews with the owners of startups in many stages carried out and the analysis of many local and international case studies. 

So what’s going wrong?

One of the fundamental truths every startup owner must understand when getting into any of the ventures is every startup in this world is unique. This insight first warns about copying other businesses. Taking the startups which failed, the most common mistake the owners have made is treating the startup as a small version of a large established business. It is a fact all businesses need to appreciate that every business needs have at least one customer as the primary qualification for being in business. This fact is underpinned by the theory that Steve Blank talks about in his book called “The Startup Owner’s Manual”; the startup must create the customer before building the company. Looking at the first type of mistakes which startup owners make through the lenses of this theory they are doing exactly the right opposite. So the opposite outcome is obvious. Hence, startups must initially focus on creating customers to sell the underlying business ideas first and then only focus on building the company with the necessary infrastructure and system. 

Let’s try to understand how startups get trapped when they make this mistake. As we all know startup is the stage of the business where the owners need to exercise good care on spending as this is the stage where the sources of revenue still need to be clearly identified and inflows would be slow and literally very less. In particular, it should be noted when such businesses don’t make customer creation the top priority, revenue generation and sustenance of the same fall into a big question. On other hand, when startups prioritise company building by trying to establish a small version of a large business by having all those key functions, that leads to huge cash outflows, waste, and finally out of cash situations due to unnecessary overheads and other expenses. Consequently, the business is not able to sustain itself and is being pushed into a forced closure. 

So how could startups avoid this trap?

In order to avoid the trap of burning unnecessary cash the startup owners need to take a methodical approach as this is an incubation stage and it needs utmost care. Since this is a volatile stage the owners may be easily carried away by the wrong understanding of the market dynamics and easily end up with big cash burns due to spending on unnecessary assets and activities. This is the stage of exploration to find the right business model for the business. The end result of this stage must be a profitable and scalable business model, it’s advisable to start with a sketch of a hypothetical business model and test it with potential customers.

Fundamentally, one important truth every startup owner is to be aware of is still the business has not met its customer yet, and in turbulent environmental conditions these businesses need to read and manage the constraints caused by the market dynamics, carefully, to spot the target customer. Most startups take a closed approach to the environment and failed to understand the market dynamics to offer the right value proposition. At this stage, the business owners spend lots of time and effort on putting up business plans for a business still a proper business model is discovered. 

The primary goal of this stage is to achieve product-market fit and the businesses need to focus on developing the value proposition, in brief, it is the offer, to attract the customers. In order for this, the business must get out of the building, listen to understand the real need of the customer, then start with a minimum viable product (MVP) and test the hypothesis to check whether the real problem of the customer is defined properly and solved. If not, reiterate it and test it again and again until the potential customers are happy with your product, by establishing a clear feedback loop. This repeating process even could end up in a situation where the business has to pivot the whole business model. One important thing to be noted here is the building of MVP must be speeded up and tested fast, as it is launched early and fail fast to save the cash and capitalise on the learning. 

This really means the startup is the stage where businesses are searching the business model to discover the right customer, the right value proposition, the right channels, customer relationship management mechanisms, the right set of activities to be performed, the right resource base to be built, and partners and networks. It should be admitted that failure would be inevitable when trying to achieve product-market fit, as businesses would have to go through many rounds of testing to redesign the product, reiterate and even pivot the business model to win the target customer. Once the product market fit is achieved, the startup must tap into the right sales model to replicate the model in generating revenue. Basically, at this point, the business must be able to draw the roadmap of how to sell the product. 

At this stage, the businesses are, predominantly, required to build marketing capabilities to generate leads. Once the product-market fit is established, the next immediate requirement is to discover the right customers, convert them to paying customers and try to repeat the business model discovered to increase the revenue by generating a mainstream customer base. The marketing needs to increase the leads by reminding the existing customers consistently about the products and attracting more customers as earning sufficient cash flow to sustain the business. The role of marketing is super important at the startup stage toward the leap into the stage called growth stage by increasing the revenue by serving more and more customers by repeating the same business model.

This exercise would help the businesses to identify, in particular, dos and don’ts to design the right in replicating the business model whilst preserving the customers, at the time of testing the hypothesis and summing up the lessons. When businesses discover a clear business model they then focus on creating the customer by trying to leverage the same business model to attract more and more similar customers and achieve more sales. This is the point where the businesses need critically review the dos and don’ts which is what talks about the fundamental constructs of strategy. 

When a business designs a clear strategy that points onward the exploitation side of the endeavour begins. It should be well noted that exploitation practices help businesses to maximise their profit and cash. When a clear strategy is discovered that helps the organisation with direction and lays the foundation for building the company by prescribing activities to be performed, functions needed, teams, and resources. This results in a sound system of business which forms the foundation for scaling up.

The above approach clearly guides the startups in the journey toward the growth stage by minimising the unnecessary burning of cash in unnecessary resources and activities whilst establishing a sustainable source of revenue through the discovery of a repeatable business model. The startup owners need to pay more attention to collecting and analysing data from this stage onward due to many reasons. First, the decisions right from the beginning are highly driven by facts and guiding insight generated from the data, and in an era of massive digital transformation, the data is the fundamental component of digital strategy. 

The startup must be equipped with data-driven dashboards consisting of the most relevant KPIs, at the initial stage as this is the stage of the journey toward discovering the business model. Here the owners must focus on generating leads, and customer conversion rate, i.e. how many paying customers are being created, minimising the time to tap into the right business model facilitated by learning across the journey, creating a mechanism to factoring the learning into business decisions, mapping out the sales process to close the deals, etc.

In summary, in order to avoid burning unnecessary amounts of cash in the startup stage, businesses must initially try to discover the customers by establishing product-market fit, validating the customer to see whether the customer could be approached via sales repeatable sales model that converts them to paying customers, then the business must create end-user demand and drive that demand into company’s sales channel, and finally, systematise business to focus more on execution and exploitation by devising the right strategy.

The writer is an Associated Chartered Management Accountant (ACMA), Chartered Global Management Accountant (CGMA) and a Certified Internal Auditor (CIA). He has a MBA from London Metropolitan University, UK and a B.Sc. Management Special (Public Administration) from the University of Sri Jayewardenepura, Sri Lanka.