Top 21 startup mistakes to avoid: #11: improper estimates of capital needed to run the business

Capital needed

“Most entrepreneurs think they can get further with less. To minimise equity dilution, they forget to factor-in unknowns, challenges or delays along the way. Startup leaders tend to plan for the best-case scenario, but that almost never happens.

“This mentality can be attributed to leaders’ positivity and having drunk their own Kool-Aid. Positivity has its place; however, when it comes to capital it often results in having to go back to the well for a less-than-ideal raise.” ~Wayne Schepens, Founder and Managing Director, LaunchTech Communications

Capital is the lifeblood of every business, and not having enough capital for the business can cripple it. Capital is the most critical factor for every business. You will need money when starting a business and to keep it running. Right from the time someone thinks of a business idea, there arises a need for funds. As the business grows, the need for money increases.

Every business, irrespective of how small or large, needs money to fulfil its short-term and long-term obligations. The mistake startups make is that they wrongly estimate how much is needed to start the business and keep it running.

Capital of the concern may be divided into fixed capital and working capital. Fixed capital refers to capital, which is used for long-term investment for the business. For example, purchase of permanent assets like equipment and buildings.

Working capital on the other hand is that part of the capital needed for meeting day to day requirements of the business. For example, payment to creditors and suppliers, salary paid to employees, purchase of raw materials to name just a few.

Be clear about the revenue model

You will need money to run your business, so it is important to think about how you are going to get the money. Unfortunately, too many startups get attached to the business idea – to the extent they do little about learning how to make money out of the business idea.

To wit, while much thought goes into the ‘idea’ that has captured the entrepreneur’s imagination, not enough attention is paid to the financials and revenue model. However, without a clear idea of how and from where the revenues are going to be generated, the venture will be a non-starter.

Businesses cannot be run for long on investors’ money alone. It is okay during the gestation period, but soon the business must generate enough revenue to at least meet the operational costs. This is wisdom!

Master the act of raising funds

Since no entrepreneur can succeed in business without funds, it behoves startups to learn how to raise these funds to support their businesses. Funding is likely the one element that owners focus on more than anything else. After all, money fuels everything in the business, so entrepreneurs do their best to acquire all the capital needed to cover their initial costs.

Inc. Magazine points out that some owners underestimate how much money they need because they do not account for unforeseen costs. It is important to state here that this results from the problem of not having a business plan clearly showing the financial projections. Leaders should always create financial safety nets to avoid any hardship down the road.

Do not wait till the money gets finished!

Most startups take a rest once they secure some funding for the early stage of the business. However, there is a need to keep looking for more money to invest in the business even if you think you have enough. It is not a wise thing to wait till money runs out before you start the process of seeking funding.

The act of fund-raising must be on the agenda of every entrepreneurial startup. Once you have secured a pre-seed or seed round of funding, you will have much to prove. Many founders sit back and breathe freely when the first round comes in; there can be a false security at this phase.

Venture Capital firms that invest in later-stage funding are more risk averse than your early stage or pre-revenue investors. It usually takes much longer to attract them and to get through the process. This is a pivotal point for startups, so have your action plan for the next round of funding in place and ready to execute earlier than you may have intended. Give yourself a bare minimum of six months so you do not run out of money.

Lack of focus on sales, revenues and profits

While businesses like Airbnb, Pinterest, We Work and Uber are extremely well-known, that does not mean they are profitable. They may have caught the attention of investors and customers, but they may not actually be making money.

Most startups need sales and revenue, and need to set profitability as a short-term target. Most startups cannot survive if they do not have steady and increasing sales that generate enough revenue to cover all costs and allow some left over to plough back into the business or distribute as profit to owners.

Sadly, because these startups do not plan for these well enough, they get to a point where they realise that there is no money anywhere to run the business. By the way, startups that do not keep an eye on expenses are equally doomed. Startups can have loads of sales and revenue, but if expenses are out of control profits will be difficult to attain.


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