If one thing is true for all early-stage companies, it is that cash is king. As Chris Gladwin, founder of Cleversafe, says, “you can’t be in business if you’re not in business.” Giving yourself the longest runway possible to make mistakes, learn, collect proof points, and gain traction with customers gives you the best chance of success.
We asked Chuck Templeton and Tasha Seitz to share their perspectives on the process of understanding cash, managing cash, and getting more cash. Below is an overview of the top mistakes entrepreneurs make and how you can avoid them.
Surprise! You’re out of cash.
- The last thing you ever want to do is run out of cash. Surprises put entrepreneurs in a difficult position – with vendors, customers, employees, and investors. Have an understanding of your cash on a weekly and monthly basis. What is your burn rate? How much is fixed, how much is variable, and how can you manage it better?
- Be cognizant of the inside and outside factors that will affect your cash flow such as market dynamics, customer concentration, and seasonality.
- If it’s taking longer than you expected to build your product or acquire customers, be proactive about managing your cash burn to buy the company more time.
- If it’s not your strength to be on top of the details of the company’s cash flow, find someone you can count on to monitor and manage your cash — you don’t want to get caught by surprise either.
You spend your cash on the wrong things.
- Think carefully about what you’re spending your money on, and how quickly/easily you can adjust the spend if things don’t go as you expect.
- You don’t need a fancy office to impress customers — build a product that solves a real pain point, and they’ll buy.
- Speaking of customers, focus your resources on the customers who will buy the product you have already built. There will always be customers willing to buy if you build XYZ feature, but those customers aren’t going to buy from you today. Don’t build features to chase future customers; spend your time finding customers that want what you have.
- Hiring employees will use up a good amount of your cash. Don’t hire too quickly. As Chuck says, “you should be in complete pain before hiring someone.” Don’t forget, equity can be used as compensation.
You don’t raise enough or give yourself enough chances to get you to the milestones that will allow you to raise more funding.
- Companies very rarely (almost never) beat their plan, usually it takes longer (sometimes a LOT longer) than you expect to build a product, acquire customers, hire talent. Stretch the cash you have as far as you can – you never know when or why you will need it to get to the next funding opportunity.
- If you are going to run out of runway prior to being able to raise money from new investors, you can “pass the hat” among your existing investors, but be very clear on how much you need and why, because you can’t go back to the well too many times without losing credibility.
- Also, be scrappy in your personal spending. Can you give something up today to take less out of the company and give yourself more runway?
You think it will be as easy to raise money now as you did the first time around.
- Fundraising can be a (very) long process. Give yourself at least 6-9 months to raise financing. Don’t wait until the last minute, or you won’t have enough time to get through the process — and if you run out of time, your negotiating position will be significantly weaker.
- In some ways, it’s easier to raise money when you have an inspiring idea, before you’ve launched a product, when the company is all about vision and possibility. After you’ve been at it a while, and struggled with building the right product, or converting customers, it can get more difficult to get investors excited. That’s why it’s important to hit milestones (see #3).
- Fundraising is all about building relationships, and successful entrepreneurs are focused on developing these relationships before they need to raise money. Yes, it can be a lot of work to maintain these relationships but the key is to get to know potential investors ahead of time. If you can understand what milestones they’d like to see from the company before you begin fundraising, it will make asking them for a check later a lot easier.
Last, but not least, selling your product is the cheapest and best way to finance your company — and also the means to get investors excited about the potential of the business. A relentless focus on creating value for customers, and being efficient with how you spend your cash along the way, will lay the foundation for future success — something your mother would be proud of.