The Startup Stat That Drives Me Crazy
Have you heard the one about startups running out of money?
Not a joke, a stat:
29% of startups fail because they run out of money.
(Here’s the original research from 2019, looking at 101 companies that shut down. It’s the top 20 reasons — more than one reason can be selected per startup.)
This stat is often cited as a reason to increase funding sources or amounts.
OF COURSE, I want more entrepreneurship and startup funding!
But I really, really dislike this stat.
The message to founders is:
Not having enough money was the problem
Ummm…last I checked…running out of money does not really magically or spontaneously happen. (Exception: hackers.)
It’s the result, not the cause.
And it’s more helpful to founders if we focus on things within their control!
There’s 1000s of decision points upstream of bank balance = $0.
Many founders change direction well in advance.
Others do wind down their business but don’t run out of money.
They find a soft landing, return money to investors, take care of employees, and do right by customers.
So how do you spot the warning signs and adjust?
Here are 4 common scenarios I’ve seen from startups with abrupt endings — and how prevent a financial emergency!
1. The Elephant in the Room
Maybe this is obvious but often many startup “problems” are because the product is a nice-to-have not a need-to-have.
No amount of efficiency, strategy, or GTM tactics can create demand that’s not there.
From the same research as my least favorite stat is a stat I can get behind:
#1 reason startups fail (42%) is “no market need.”
Seems like a good idea. You’re passionate about it. You got good feedback. But the business isn’t growing!
You may need to change course if this is happening:
Building for weeks without selling it or talking to customers.
Sales are sluggish or non-existent.
Only the founder can sell it.
Adding more features is the solution to unlock revenue.
Customers are “too busy” to buy, implement, or use it.
So, how do you make sure that you’re a pain killer not a vitamin?
Have customer pay before you build it
Lots of Mom Testing
Solve a big, messy problem
Believe what people do (pay you, use it daily), not what they say (“I really like it.”)
And all the other signs of Authentic Demand!
Wondering if there’s a big ole elephant at your startup? Check out these signs it’s time to move on.
2. Hiring on Forecast, Not Actuals.
“The financial model says we can hire 3 people.”
…but you didn’t hit the revenue target last quarter!! 😬🥴🫠
My favorite startup hiring strategy is to “unlock” new hires as you hit revenue, cash flow, and profitability goals.
A close (bad influence) cousin of “hiring on forecast” is “hiring based on revenue, without understanding expenses or cash flow,” which is how good companies can quickly get into trouble.
People are almost always the most expensive line item in the budget.
Make sure you can afford (and really truly need) that full time hire before committing.
If you’re on the fence or want more flexibility, try these options!
3. Not Making Personnel Changes Fast Enough
Often (but not always), it’s an expensive executive.
Someone well-spoken with a great resume…who is just not delivering results for your company.
(And likely blaming other parts of the business for the shortfall — but in a really smart, not-a-jerk kinda way.)
The wrong person in a key role can cost a startup a lot of money, time, and missed opportunity.
Not to mention the cost of auxiliary items: campaigns, events, software, hiring, and other strategies initiated by this person, using up time and money with no benefit.
It can be in any role though. The smaller the business, the more important each hire is, regardless of salary.
If it’s not working out, do the hard thing sooner rather than later!
4. Going “All In” Without Testing or Data
This one is a little bit nuanced because sometimes founders need to make big bets.
Salesloft famously pivoted away from their main early product (Prospector) with 5x more revenue to double down on what became their scalable hero (Cadence).
BUT — going “all-in” based on instinct alone, without monitoring the cost, results, data, and customer feedback, can sink the ship.
This applies to sales and marketing strategies, new markets or customer segments, or new product lines.
So rather than pivot the company on a dime with no info, take a beat to:
Mom Test the idea
Build a “tiger team” to execute on it (e.g. your top two people)
While Salesloft did “bet the farm” on their new product, they had many paying customers who were loving the new direction.
It was a bet…with the odds clearly and significantly in their favor according to the data!
What’s your least favorite stat that gets thrown around?? How do you stay close to your finances? What financial and business risks have been worth taking?