How startups should learn the importance of capital management from teenagers
Startups burning investor's money can be easily associated with teenager's burning their dad's money.
I know, you know that we all in our teenage wanted some money but being a juvenile, it was really hard for us to find a job that pays well and we get stuck with limited things that we can do. One of them is to ask your parents to give you some allowance.
In this case, my parents were kind enough to give me a handsome pocket money for helping them out with daily chores.
Honestly speaking, it was much more than just pocket money. It was my hard earned money, after all. Not only did it make me feel independent but also taught me one of the most important lessons of life: The value of money.
But what did I actually do with that money? Did I invest it the correct manner? Or used it in some productive way?
Just like other teens, I wasted it. I bought some cool gizmos, bikes, and toys.
But that was when I realized the need to save money and avoid overspending. It helped me understand that things cost money and that money doesn't grow on trees.
One needs to invest it wisely for better returns in future.
Not everyone can digest this fact. Especially, the startups of today.
Running out of Cash
Not a pretty unusual situation with startups, a report published by Forbes states that being the second biggest reason of a startup failure, 29% of startups collapse due to running out of money.
It might happen because they are underfunded. But, in most of the cases, it is found that reckless spending kills the startup even when they receive too much. If a startup burns money like crazy, the reason is largely that the investors are giving them ample amount of money to burn.
Often, the significance of capital is disregarded, leading to an inevitable failure. It happens when the management fails in keeping an eye on the cash flow until the money supplies become inadequate to support the business to the next milestone. Although it still might be feasible to raise fund again, the valuation gets crucially compromised.
Most of the startups consider it as a milestone to figure out when to start the next round of fundraising. Although logical, this method seems to be highly flawed and can hinder the growth of a startup. But, what is to be done?
Differentiating between necessity and luxury
The first step of saving money is to understand the difference between necessity and luxury.
With that being said, one should spend money on the business plan, research, human resource, branding, and networking rather than buying expensive clothes or equipment, overpriced subscription-based web services and renting a fancy office having all sorts of plants and trees.
Also, funds spent on lavish business parties should be minimized. It might be a good way to watch your startup grow, but if your business is not ready for it, then that's sheer wastage of money.
Although the situation is something to worry about, one should remain calm and try to understand the underlying business issue that caused the problem.
The next step is to prioritize how to spend the money you are left with. All the tasks should be executed promptly.
Also, it would be wise to search for ways to keep your startup self-funded. You may consider taking outside projects or outsource the human resource to reduce operating costs. Although it will slow down the growth of your startup, it's way better than simply dying.
Capital management plays a very crucial role making a startup successful. One needs to take care of it right from the start. Also, make sure to have a backup plan to get through the hard times with least possible damage.
Always remember the key- Giving up is NEVER an option. Especially for a startup guy!