Bringing something to life is hard. Ending it is easy. It’s almost surprising how easy it can be to kill a startup.
Each year, ambitious entrepreneurs start new businesses. Yet, small business statistics often show that half will go under by the end of their first four years in operation.
In Newchip’s accelerator, I get to work with entrepreneurs in many verticals and with different business models. Some are cash flow positive. Some are funded. Some we have helped get funding.
While the successful startups with whom we have worked have a multitude of reasons for being successful, all the failed startups committed the same mistakes.
In the startup life, it doesn’t take a continuous calamity of errors to end your dream and business, it only takes you doing these three things.
Your startup accumulates too much debt
Regardless of whether you have cash flow or are solely relying on investors, taking on debt is the easiest thing that you can do to quickly kill your startup.
Forget the tax benefits that debt can have and focus on what debt does to cash flow. Now don’t get me wrong, anybody with a degree in business can tell you about capital allocation strategies and how capital structure underpins and is guided by strategic business goals. But almost all startups aren’t thinking about either of those when taking on debt.
Startups that take on debt normally do so to plug a hole somewhere. Maybe you missed a pay period and are looking at the possibility of not paying your people for the second time in a row. Maybe you had an overly rosy picture of how sales were going to pan out for you. Either way, if you build this debt as a method by which to stay afloat rather than grow your business, you’re going to be out of business quickly.
Secondly, investors hate having their money used to pay down debt. Sophisticated investors understand the principles behind working capital turnover and the increased risk that debt brings with it. They also understand that debt financing and debt capital are respectable corporate financial tools. However, because they understand this, they also can quickly tell whether the debt was used strategically or was used to fill a gap.
Nobody ever wants to board a boat that has sprung a leak. Don’t be the captain of a slowly sinking ship.
Your startup lacks focus
Entrepreneurs are innately built to see opportunities. You wouldn’t be in the startup game if you weren’t built this way. However, all too often, startups that fail do so because they are trying to do too many things at once when they have something that is starting to work. There are tons of opportunities out there.
There are tons of complimentary product offering possibilities. So, when things start working for a startup after it has struggled for so long to gain customers, get funding, and bring their MVP to market, some founders will inevitably get the itch to add more to the scope of the business. Too much can kill that singular focus on what your business does well.
Fortunately, founder scope creep is easy to spot if you know the signs to watch for in a balance sheet. Look at where cash is being diverted to that takes away from the core product line. If you need a new business model to build out what you’re developing using diverted funds while you are still operating under the old business model, you have founder’s scope creep.
It doesn’t always have to be a new product that takes away from the focus of the company. Attempting to revive past attempted products to try something entirely new is another way CEOs divert resources from the product or service that is gaining traction.
The bottom line here is this: Stay focused to stay in business.
Your startup relies too much on investors
Having invested in startups, raised money for startups with whom I have worked, and sought funding for companies I have co-founded, I know how hard it is for an entrepreneur to stop tapping that sweet investor vein of cash. Once you get good at raising and have a solid bench of investors, raising another quick $300,000 for a bridge round is much easier than either cutting costs or finding a way to bring in additional revenue.
At a certain point, 99% of startups eventually run out of investors willing to give them money. Your valuations get too high. You might take on an outsized portion of their investment portfolio. Whatever the reason, eventually investors will stop investing in a company that can’t bring in cash, especially if it’s to pay down debt.
Stay disciplined and spend your time planning, thinking, and having a lot of meetings with your employees.
Guest author Joshua Lawton-Belous is a serial entrepreneur, angel investor, and an adviser at Newchip. You can follow him on Twitter @AlertingMainSt and connect with Lawton-Belous on LinkedIn.
Featured image is of someone’s hand reaching out from underwater. Photo by nikko macaspac on Unsplash.
