As I look back to my career as a ‘startup banker’ I have to admit that not all ventures were successful. The most common causes of failure in the first three years of their existence are:
- Lack of skill and experience of the entrepreneurs. As I wrote already in other posts, the ‘Who’ of the entrepreneur is one of the most important elements for a banker to give that loan to start up the business.
- Underestimating the financial resources they need. Most startup businesses are under-capitalized and won’t survive the first ‘storm’ in the market. Those who won’t survive are those ventures whose business plan was over-optimistic about sales and income. The golden rule is simple: overestimate the expenses and underestimate your income. When an entrepreneur uses this rule their chances of surviving the storms are much, much better.
- Uncontrolled expansion. Expansion of the business is OK. As long as you have the financial resources and that your cash flows are stable. You need money to support expansion: overhead cost has to be paid, selling more needs more working capital. If expansion starts without a ‘war chest’ it will be hard to survive.
- Weak (or even No) management. There are startups, founded by very enthusiastic and intelligent people with great business ideas who fail before they start. Because of no management skills! Founders and there teams have a lot of technical skills in developing new products but lack management skills, they don’t have no idea about business planning and don’t have any idea why they should hire an accountant. And sales?
- Credit & cash flow problems. Some entrepreneurs don’t pay enough attention on their working capital management.Their clients pay late, or sometimes not at all, and there is no systems in following up. Their credit lines in the bank are completely used and no money is coming in. Whatever the size of the startup, the CEO or the Principal needs to be directly in charge of cash flow. This is nothing to delegate because its the lifeline of the business. Of course, in a later phase a CFO has to take charge of this but in the beginning it’s the responsibility of the founder.
- Taking too much money out. We all know those startups where the BMW or AUDI for each of the founders is on top of the list. Offices are so flashy, furniture top of the bill. And of course the salaries are in the same line. Believe me, this is not the best way to survive as a startup and surely not the ideal path to convince investors and banks to fund your startup.
A good business plan can avoid, perhaps not all, those mishaps. As Philip Kotler wrote ‘the process of business planning may be more important than the plans that emerge…. Entrepreneurs must think about what has happened, what is happening and what might be happen…’
Entrepreneurs must ask themselves questions as:
- Where are we now?
- Where will we likely be in 6 months?
- One year? Where do we want to be?
- How will we get there?
- How will we know that we are on the right track?
(c) Raf Vlummens 2016 – Article first published on https://EntrepU.wordpress.com