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Impacts of financial decisions
Start-ups: Stay Disciplined and Focused With These Five Resolutions
The beginning of a new year is always a good time for resolutions. Setting goals for yourself and your start-up is a great way to keep moving ahead and to measure progress. Whatever the stage of your business — and whatever the time of year, for that matter — these best practices will help you stay disciplined and savvy in your pursuit of success. Like all good resolutions, they call for a little self-control and sacrifice, but every entrepreneur knows those are badges of honor in the highly competitive world of emerging businesses.
Resolution #1: Remember that you’re not in the business of business planning
I often work with start-up founders who operate as if business planning is their actual business; they spend far too much time drafting and updating a lengthy plan document to the detriment of their true organizational purpose.
Sound like you? Remember that your start-up has two limited resources: time and money. How you manage them profoundly affects the outcome of your business. It’s better to directly and quickly address your “go” or “no go” issues rather than spending precious time memorializing them on paper.
Make no mistake: A business plan is absolutely critical to a start-up, from the pre-entity phase through every aspect of the company’s development. An entrepreneur must carefully lay out a business case and thoughtfully address risks, opportunities, market, and competition, among other things. But remember that the substance of the plan is more important than the form. In the world of start-ups, the written business plan is often outdated by the time the ink dries. Don’t get carried away with the document. Be more focused on action, and use momentum as an advantage.
Resolution #2: Burst your bubble
Start-up entrepreneurs can easily catch a bad case of tunnel vision. It’s understandable. As a founder, you will not come across anyone else with the same passion for or understanding of your business, and that can get a bit isolating. Resist the temptation to withdraw or to avoid skeptics and naysayers.
It can get comfortable inside the bubble of your dream, but as your start-up develops from an idea to reality, you’re going to find yourself relying on investors, employees, and ultimately customers. You can prepare to present and defend your business concept by telling your start-up story to everyone who will listen — and by inviting their constructive input. You’ll learn to concisely and effectively describe your business and the market opportunity, build your pitch to investors and customers, and identify weak spots in your plan. This is especially helpful if you are a founder with a deep technical background such as an engineer, scientist, or software developer. Keep in mind that most people don’t speak your technical or specialized language and that the success of your business is dependent upon your ability to translate it to others.
It is especially important to get advice from people outside your circle of friends and family. Friends and family do not make good focus groups. Their responses range from telling you that your start-up idea is “absolutely brilliant” to warning you that you should get a real job to pay the mortgage. Either way, they probably won’t give you what you need, which is meaningful advice and probing questions that help you to critically think through your strategy.
Resolution #3: Embrace the need for speed
As a start-up, time is not on your side. Competition is fierce, investors can be impatient, and risks increase as the clock ticks by. You want to get though the development stage and generate revenue as quickly as you can. Extended time adds a dimension of risk and vulnerability along your way to the break-even point. This has a direct effect on the success or failure of your start-up, so budget your time like you do your money.
Also — and this is critical — don’t fear launching your business before you get everything perfect. Your product or service may not immediately materialize precisely as you dreamed it would, but take it to the public at your earliest viable opportunity. Early feedback from customers is essential, even if they are paying a substantially discounted price (or no price). They will confirm whether or not the time and money you have invested have been adding value to the business. The sooner you confirm whether or not you are on the right track, the more focused and confident you can be.
Resolution #4: Spend other people’s money wisely or not at all
If you’ve started a business, then you have experienced the “thrill” of managing it with no revenue and never enough cash. It can be tough going, but as you start to raise capital financing, be careful what you wish for. The game changes when you become accountable for spending someone else’s money, and the temptation to spend begins the moment your capital round closes and the deposit hits your bank account. As an early start-up, you were originally undercapitalized and cash-starved, with no opportunity to unnecessarily spend your limited resources. But once you become a start-up with funding in the bank, it becomes much more difficult to say no to spending. It’s easier to manage money wisely when you don’t actually have any.
The mistake many start-ups make is using a capital infusion as an opportunity give their business the appearance that they have “made it” by renting and decking out shiny new office space, printing flashy letterhead and business cards, and treating employees to lavish perks. Don’t do it (except for the kegerator). Your basement makes a perfectly fine workspace, and you can reward your hard-working employees when the profits start rolling in later.
Until your start-up’s cash flow becomes self-sustaining, you should put all expenses into two categories: value-add and non-value-add. Any cost that does not add value to your product or incrementally add to your enterprise value should be eliminated or delayed. All startups will at some point encounter unexpected and costly speedbumps along the way, and the preservation of your capital will be rewarded.
Resolution #5: Keep your cap table simple
If you’re like most start-ups founders, you will have to raise capital at some point, whether it is from friends and family, angels, or venture capitalists. Be aware that with each round of funding, investors will want the same rights and privileges as the previous round’s participants, plus some additional rights.
It’s not uncommon to see early-stage companies with highly onerous capital structures. I have come across many start-ups that have not been able to secure later-stage funding without concessions from the prior investors, which ultimately come at a cost to the founders, option holders, and other early investors.
It’s your job to protect the shareholders’ rights and ensure you are not setting yourself up for an equity catastrophe at some point in the future. For example, if a seed-round investor asks for preferred stock with stated dividend, liquidation, and other preferences, you need to make a decision whether that investor is right for your business. It can be tempting to accept these terms in order to secure funding, but it shouldn’t be done without consideration for existing shareholders and future equity partners.
These five resolutions aren’t an exhaustive list of best practices, but they are certainly some of the most important in taking your business from the start-up phase into the category of well established, successful ventures. Prudence and self-discipline are always necessary in business but are especially critical in an organization’s infancy.
How we can help
A tremendous amount of strategic planning goes into start-ups, from entity formation and financing to forecasting and budgeting. Our technology and emerging businesses industry practitioners know what it’s like to be in your shoes and can give you guidance in the pre-entity stage and every step of the way after.