A Survival Guide for Early-stage Start-ups
Successfully navigate an early-stage start-up through its first couple years in business and your odds of survival are much greater. But how, exactly, can you do this?
It’s a well-known fact that nine out of ten start-ups fail within the first five years. This doesn’t even account for the greater number of start-ups and start-up ideas that die before company registration. Successfully running a start-up is no mean feat; it takes grit, determination, smart planning and a healthy dose of luck.
The early stages in a start-up’s life cycle are arguably the most dangerous. Successfully navigate an early-stage start-up through its first couple years in business and your odds of survival are much greater. But how, exactly, can you do this? Let’s take a look at these survival tips to pull your start-up through its earliest, most difficult period
Ideas are great, but implementation is all that really matters
Remember that Eureka moment when you had that idea for disposable dog shoes? Great ideas aren’t as special as they seem to be. At some point of time or other, almost everyone will think up something that’s revolutionary. If all those ideas were accompanied by well-thought-out implementation plans, Bill Gates wouldn’t have bragging rights anymore. The single greatest cause of start-up failure is the lack of a realistic, viable implementation plan in the ideation phase.
How do you avoid this pitfall? The key is to slow down. When coming up with a great start-up idea, you need to ask yourself a number of critical questions. The idea itself answers only one of these: “What problem does this solve?” Here are the rest:
- Who does this solve a problem for?
- Is that problem worth solving?
- Will the solution cost you a non-zero amount of money to develop?
- How will you monetize this solution?
If your innovation is useful only to people who can’t afford to pay for a solution, or to people who are interested but not enough to pay for your solution, it simply does not matter. You will need to re-evaluate how your solution can address the needs of a sufficiently large paying audience. The other thing to keep in mind is how much the solution will cost you. Service and consultancy start-ups inherently carry a lower risk because of the lower capital requirements. If you have an idea for a mass-manufactured product, you might want to go back to the drawing board unless you’re an industrialist with a few million dollars to spend. Try your best to identify ways in which you can offer your product at zero or notional cost to yourself. This will ensure that cash flow always remains positive.
Be smart about financing
Start-ups invariably cost money. This means that you’ll need to have a clear picture of your financing strategy early on. Otherwise, failure is almost guaranteed, not to mention personal financial loss. The first step in start-up financing is seriously thinking about how to not secure financing. This might appear counterintuitive, but it is critical. A common thought fallacy is that “money in equals money out”. This is rarely the truth. The amount of capital you invest in a start-up is not guaranteed to correlate to the amount of profit (if any) that you’ll reap. What matters most is identifying where money can be invested effectively. Look to maximize your return on investment with every financial decision. Invest only as much as you need to and in the areas that you identify as being critical. Find ways to do more for less. Technology and the Internet make it possible to deliver many solutions remotely, drastically cutting costs. Only invest a significant amount of capital if you have a very clear plan about what you plan to do with it, rationalizing every cost. Look at your personal savings before considering debt financing. If your business idea requires you to take out a loan, sit down and rethink it; identify possibly way to rationalize costs and only move forward once you’ve settled on a minimum viable level of finance.
Keep a close eye on cash flow
You only accumulate reserves by saving. This means that even the most successful early-stage start-ups will have limited cash reserves to address sudden changes to cash flow. When your cash reserves are low (or non-existent) any disruption to your cash flow or any unforeseen expenditure has the potential to bring your entire business grinding to a halt: How do you buy supplies if a client delayed payment by a week? In order to mitigate risk, you need to organize expenses in such a way that your business is resilient to cash flow disruptions. This could mean being conservative with your orders, minimizing discretionary expenditure, or entering into credit agreements with suppliers. The aim is to monitor cash inflows and outflows to ensure that you never run out of liquid cash when you can’t afford to.
Compliance: always be a step ahead
Innovation has one critical problem inherent to it: newness. If your start-up focuses on cutting-edge technologies or emerging sectors, you need to have a keen awareness of the regulatory environment. Technology is accelerating at an exponential rate and lawmakers are struggling to keep pace. Sometimes, this results in poorly thought-out legislation that restricts opportunities. The government’s overzealous approach to commercial drones is one example: India’s tryst with drone delivery ended after just a few pizza drone deliveries. If your start-up operates in an emerging sector, it’s not enough to ensure that you’re in compliance with existing norms. Through careful research, you need to identify policymaking trends and adapt your solution accordingly so that it remains resilient in the face of changing legislation.
Every start-up currently in existence is a success story: it’s no easy task to build a business from nothing. Still, there are a few things prospective entrepreneurs can do to significantly increase their chances of survival: plan for every contingency. Always invest within your means, and be proactive about compliance. These tips aren’t a guarantee for success, but, with the right amount of grit and perseverance, they can take you far.