Why You Shouldn't Fundrise and Burn on New Hires For the Further Success of Your Startup

One out of three startups fail because they run out of cash or can't raise enough funding. That number, along with other statistics such as the fact that about 90 percent of all startups fail, 70 percent fail within five years, and 18.4 percent of all U.S. private sector business fail within a year, might make the entrepreneurial landscape seem bleak.

However, it doesn’t have to be. Once you’re brave enough to lead your own startup, pay attention to your finances and don’t make the same mistakes as the founders who have failed.

1. Build your business model first. 

Founders have a tendency to try to grow and expand as fast as possible, assuming the profits will follow in time. This is the opposite of how to be successful.

Classic examples of this include Crumbs Bake Shop and Zynga, both of which had a meteoric rise to fame and an equally spectacular fall because they focused too much on rapid growth and not enough on long-term financial health.

We’ve seen a lot of failed services that bet too much on robust expansion and wound up over-extending themselves beyond saving. For Food Rocket, we establish a profitable business model first and only plan expansion when we’ve refined and solidified the model.

2. Don't try to fundraise with zero traction.

If you're pre-MVP and pre-revenue, don’t waste time with fundraising efforts. There are lots of reasons to wait, but founders are especially keen to “grab the money while it’s there,” especially now.

This is a mistake unless you have a specific, immediate need for capital. Founders who try to raise funds without specific needs and long-term plans for the funds often fail. Part of the reason is it’s too easy to expand your spending alongside your new account balance (which is a trap!). The other part is that the more investors you take on early, the less say you’ll have in the direction of your company overall.

Unless you're a previously successful founder, focus instead on developing your product and getting it to beta testers. This is how you get actionable feedback, which gives you something worthwhile to show investors when it’s time to raise funds.

2. Know when to hire a financial analyst.

The common refrain in VC has always been that you don't need an internal finance person until later growth stage equity rounds. The mistake here is taking that advice as gospel rather than suggestion. 

Remember: The more basic the needs, the more basic the skills needed to perform them. 

In some cases, hiring a competent CFO or analyst and letting them build out a financial strategy and contribute to the business model, control burn rates and follow the compliance to regulations might be the right path. This is crucial while making any new deals or if you’re running a low-margin business.

Unless someone on the founding team has deep financial experience and also plans to step in as long-term CFO, startups should seek out a financial analyst no later than their first seed round. 

4. Know whom to hire - don’t forget about retention. 

One of the greatest expenses of any company is its people. To keep your costs low, you need to consider ways to save money on staffing. 

A big mistake many startups make is hiring too many people too early. Having a reliable team is crucial to long-term success, but it’s important to remember that there are huge costs associated with every new hire. For example, one of the reasons for the failure of car startup Beepi was a large burn on high salaries and overtime. 

The high cost means retention is just as important as good hiring, which means your management team needs to be top-tier. According to the U.S. Bureau of Labor statistics, turnover rate for startups is around 26 percent, or double the industry average.

Churn rates have a substantial financial impact on the bottom line of businesses. On average, companies burn 6 to 9 months of salary in recruiting and training a single employee. In a time where the average software developer in San Francisco makes $139,000 a year, those numbers add up quickly. 

Other negative externalities -- an overworked recruiting team, decreased company morale, loss of company-related knowledge, relatively lower experience all around, among others, also adds up.

In the early stages, it’s best to keep the team as lean as possible to conserve resources. Add people on an as-needed basis, and do a cost-benefit analysis before hiring.

5. Outsource wisely.

Deloitte found that 70 percent of companies that outsource do so to minimize costs.  It's best to immediately hire reliable talent to shore up weaknesses or fill skill gaps. This stage shouldn't be outsourced because founders will want close access, and these people will likely become an essential part of the business moving forward. 

Outsourcing is often the right choice when you need niche experts. Research shows that smart outsourcing can increase productivity up to 100-fold, and I can attest to how much smoother everything runs when you focus on what you’re good at and let outside experts do the parts they’re good at.

Remember the Number One Key to Success

The most important thing to remember is that long-term success hinges on good financial habits in the early stages. Every decision you make, from hiring to marketing to choosing a back-end software package, has a ripple effect on your overall financial health.

Put in the upfront work to get your cashflow in order, and ensure all financial data flows into your books correctly. 

Every mistake is avoidable, as long as you remember to look for it. Keep these lessons in mind to save your company a lot of headache down the road.

Posted In: contributorsStartups

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