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Three ways money can kill your start-up

Wednesday, 9 October 2013 | By Marc Peskett

You’ve got an idea that you want to bring to realisation, what’s the first thing you think of?

 

“Where will we get the money from?”

 

Most start-ups struggle with not having enough cash and as a result never achieve their full potential.

 

Money is a critical asset, but it also can kill your start-up. Here are three ways that raising money can be your friend and your worst enemy.

 

Not having enough money

 

Most of the world’s successful start-ups need to raise money at some point, and this is usually a make it or break it moment for the business. But how much money do you raise?

 

When you are talking about start-up funding it is measured in time. Most start-ups (nearly all of them) are not profitable straight out of the gate so they have a certain amount of time before they burn through all the money they have and nothing left to keep them afloat.

 

For example, if you don’t have enough money you can’t develop your idea, if all you have is an idea you need a prototype, if you have a prototype, you need to launch it, if you have launched you need to become profitable and so on and so on and it never ends.

 

So when you are thinking about raising money, think about the key stages and milestones and work out how much cash you will need to get through each stage. Make sure you have people around that can give you great advice and help you work out how much you need to get you to that next step in your process.

 

Match the funding sources to the needs of the business. Start small, look at grants and other cash flow options, get a great mentor/business advisor and plan your funding cash flow from the start, then you can look at more robust options that align with your development timings.

 

Spending too much

 

This is a hard one to wrap your head around especially if you are bootstrapping at every corner, but it does happen and is a common cause of failure.

 

Some entrepreneurs will underestimate how much they need to spend, so they can appear prudent to investors, as they think this is what investors want to see. They are also concerned about minimizing what ownership they need to give up for the capital. This is dangerous. If you don’t raise enough it is difficult to go back to the market to raise more before you need to and it may lead to greater dilution.

 

On the other hand, raising more money than what you need can also cause problems. Firstly it can lead to greater dilution of ownership it can also lead to lax management of spending. There is nothing like the fear of running out of cash to help you control your spending.

 

The most common mistake with spending in start-ups is to hire too many staff that do not have an essential role. This burns through your money and adding more layers of decision making can slow your concept and development phases.

 

These days this situation is not as common as it used to be. We seem to have a lot more tools and restraint when it comes to start-ups and new ideas/business development. But no matter what you need to integrate someone in the business to look after and manage the incoming and outgoing monies or this situation could become a reality quicker than you think.

 

Raising too much money

 

It's obvious how too little money could kill you, but is there such a thing as having too much?

 

Sometimes it’s the money, and sometimes it’s what comes with raising too much money.

 

If you raise a large amount of money from a venture capital company they are not going to let you operate your two person global start up from your garage anymore. Once that money has cleared, the clock is ticking for you to start growing, returning the investment and getting wins on the board. This means a lot more pressure and responsibility.

 

Get the right people around you as soon as possible that can help support the new administration roles that you need. They don’t have to be full time; they can be in the form of a virtual chief financial officer or an outsourced accounting, legal and administration team.

 

Raising a fair chunk of cash also takes a lot of time. You don’t want to get so caught up in raising money while your competitors are out there going first to market or taking over your market share.

 

Go out and invest in great advice and trusted partners, surround yourself with great business advisors, raise the money you need strategically in time increments, and you will see the road to realisation and success.