Startups often have a close group of passionate people working toward a common goal. However, this isn’t always enough to ensure success.
In 2019, an estimated 90% of startups failed. One of the may reasons being that they ran out of runway.
Startup runways are the amount of time a startup has until they run out of cash. To figure out your startup runway, click here.
With months at stake, one of the worst things a startup can waste is money.
Here are some common ways startups lose money, and what you can do to avoid making the same mistakes:
They don’t hire
With money being tight, many startups hope to cut extra salary costs by doing it all themselves. If a company doesn’t hire they may actually be turning down revenue that far outweighs an employee's salary.
Another downside of not hiring is that churn rate can increase. Customer churn is the amount of customers that stop using your service. Overworked founders can lead to poor customer service. Poor customer service is a recipe for high churn.
If you’re ready to hire, use Causal’s Startup Liquidity Template to help you figure out what you can pay your employees. You can adjust this template to fit your company, and make the hiring process easy.
They hire too much
Startups over-hire for several reasons:
They overestimated their growth
With expansion comes the need for additional employees, but overestimating the growth could come with hefty price tag and greatly shorten a startups runway.
This will increase your burn rate. Simply put, burn rate is the rate in which a company is losing money per month. The more costs, the faster the burn rate. Startups tend to have a positive burn rate, meaning their losing more money than they’re gaining. There’s only so long this is sustainable.
They don’t have a business plan
Business plans are essential for investors, but they can also guide a company's hiring process.
This template can help you plan for salary expenses.
They try to fix problems with hiring
Without financial analysis trying to fix an issue such as a high customer acquisition cost or a high churn rate can seem like pinning the tail on the donkey blindfolded. Full financial analysis is needed to properly understand why some of the data looks worrying and rectify it before it becomes an issue.
Some companies hire to fix an issue, without understanding where the problem actually stems from.
They don’t use cost-based pricing
All companies have costs. Only the good ones use cost-based pricing.
It seems intuitive that the cost of your product should be less than what you sell it for, but first you have to find your costs.
There are two main types of cost.
Fixed costs remain the same no matter what. This can include rent, loans or any other cost that doesn’t typically fluctuate.
Variable costs are costs that depend on many factors such as the amount of product created or distribution costs.
Companies price their product with different markups, knowing your company, competition, and target market are key. To read more about cost based pricing, click here.
They don’t perform market analysis
Market analysis consists of many factors including competition, demand, target market and pricing. Basically, it’s analyzing everything needed to be successful within your market.
Companies that don’t conduct market research can burn cash on errors. For a established company this is a hard lesson, for a startup it can put them out of business.
An example of this is the McDonald's Arch Deluxe burger. This burger was supposed to be aimed at adults as a sophisticated version of the classic McDonalds meal. Even though the company spent around $200 million on advertising the product failed. Why? It didn’t appeal to their target audience.
McDonalds had made a name for themselves as quick, easy, and affordable fast food. The company ignored what their market research told them and advertised to another type of target customer, instead of their loyal customers. Not only that, but the brand priced their burgers much higher than normal, confusing their clientele and isolating them amidst their cheaper fast-food competition. Their ads weren’t successful, and the product seemed to directly contradict what had made the fast food giant so popular in the first place.
They market poorly
Marketing is expensive, but can yield a high return on investment. Other startups, like Quibi (who crashed pretty hard) learned the cost of bad marketing the hard way.
Quibi spent 5.6 million for a superbowl ad that left viewers unsure of what the product was supposed to be.
Good marketing increases brand recognition, entices new customers and gets noticed (To read more about what makes a successful ad, click here.) Quibi’s marketing failed to do this. Their target audience would have been on major platforms such as Twitter and Instagram, but Quibi didn’t have a presence there either, completely ignoring the base that was most attracted to their competition.
Their cost per user is too high
Not everyone buys the cheapest product on the shelf, but a low price compared to competition certainly helps. Startups have high costs and low revenue. In order to boost revenue, some will up their price.
They don’t plan for a range of scenarios
Causal knows that business can be unpredictable, which is why our templates help you see the outcome of many different scenarios, not just one. Companies that only plan for one outcome can find themselves surprised by a turn of events.
How Causal can Help
Causal's startup suite gives you all the tools you need including:
- A startup runway calculator so you can time it right
- A KPI tracker so you can measure how well your company is doing
- An employee compensation calculator so you can show new hires the upside to joining your startup
- A sales/marketing funnel so you can understand what your funnel has to look like to make your revenue goal.
Causal understands that money is a precious resource for startups. Our templates will help you make effective financial decisions for your startup.