Why Startups Run Out Of Money

on August 8, 2014 Running a Biz, Startups with 0 comments
Why Startups Run Out Of Money


America is flushed with investment capital. If you got a solid business plan, proper experience, and passionate enough, you will eventually find a seed investor that will invest in your startup. Getting awesome capital to jumpstart your business idea is great but this can be a reason why startups run out of money. It seems the more capital Entrepreneurs have to start, the more they commit to bigger capital investments and recurring income. I should know, I have been there and done that.

What does it mean to manage your expenses and focus on revenue generation? When an Entrepreneur lands a big investor he makes a choice about growth. He/she can commit cash to grow “inventory” giving the impression of a larger company. This is often tempting and I see it as counting your chickens before they hatch. Instead they should be focusing on revenue and income growth. While there are startups that get $20m in funding who can sustain losses for 3 years, most of us have much less investment capital than that. What do I mean by growing “inventory”? Here is a list of sometimes necessary, often times unnecessary expense commitment Entrepreneurs often make that burn up capital real quick and why startups run out of money.

  • Over committing and expanding the R&D too fast. For example, a software development startup with no product ready to go to market. The founder then further commits to developing more products before they have any revenue stream or prove market demand. Don’t over develop. Go to market with one product, get feedback, bring it back and refine it, redeploy.
  • Over committing on office space, warehouse, etc. It’s great to think big and be confident of the business growth but don’t start out with a “corporate” size office or warehouse before you are even halfway there. Recurring costs are a damper to resource which could be redirected to revenue generating profit centres.
  • Growing your “inventory” too fast. For example, if you resold outdoor media space, don’t commit to too many real estate owner leases just to look like a big and established outdoor media owner. Try creative ways to increase “inventory” while reducing commitment. If you require products from a supplier, negotiate a higher price with your supplier so that you can get smaller more frequent orders. While you make less margin, you reduce inventory and storage costs.
  • Don’t make unnecessary purchases that may give you unvalue-added. When I started a courier company that serviced a major bank and credit card company, we signed up and purchased GPS walkie talkies for our delivery personnel. It sounded sexy during our sales pitch at the board room, but it was more hassle than help (it didn’t work well in 2004). Worse, it cost us quite a bit of recurring expense to have the “GPS guided” tagline. It was sexy to have GPS technology back in 2005 when everyone else didn’t. We eventually terminated the contract and took a contract loss because we found that the good ol mobile phone was better.

Hope this helps!
Dan Tan

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Up to 8 Methodologies Used:

1. Income approach: 3 methodologies.

2. Market approach: 3 methodologies.

3. Asset approach: 2 methodologies.