Expanding a business venture could very easily become a colossal task, fraught with dangers of all kinds. As per a survey conducted by the Office of Advocacy of the Small Business Administration (SBA), about 21.3% of small businesses fail in the first year. Moreover, the survey also found that about 50% bite the dust after five years, and only 33% make it to 10 years or longer.
What’s even more intriguing is the number of startups that have failed after they received funding, a whopping 75% as defined by Statista.
This metric can be discouraging, but the fact is that most of these startup failures occur due to mistakes that can be avoided.
Let us look at six of the most common post-funding mistakes by startups and small businesses:
1: Poor recruitment process
Expanding your team of professionals is a necessity but more often than not, small business owners do not plan out the recruitment process properly. They either make a mistake of hiring too many employees or hiring those who do not have the necessary skills and experience. It is very important to use the right strategies to hire employees who can give you results.
At the post-funding stage of your business, you should rely more on qualified professionals than obsessing over creating a dream team of hundreds that can compete with the hordes that many Silicon Valley businesses boast of.
Numbers aren’t always helpful.
Also, on the contrary, relying too much on a small team to multitask and fulfill multiple job roles can be again a major problem.
While it may be seen as profitable to hire a smaller team, it can be your undoing when it comes to scaling up, the need for which can come fast and unannounced in many cases.
Having a balance of essential team members and a support team would make the process easier and more fulfilling.
“At its peak in the late 1990s, Blockbuster owned over 9,000 video-rental stores in the United States, employed over 84,000 people worldwide, and had 65 million registered customers. Once valued as a $3 billion company, in just one year, Blockbuster earned $800 million in late fees alone. But fast forward a decade, and Blockbuster ceased to exist, having filed for bankruptcy with over 900 million in debt.” (1)
Overpaying employees or hiring people for unnecessary positions could easily be avoided. As a startup or small business, you don’t need to worry about hiring receptionists or assistants. Planning a yearly budget for employees proves significantly helpful to avoid such extra spending.
Hiring employees without a properly structured, formal recruitment process, and without defined job roles is also a dangerous path. Make sure the people you welcome in your office know what they’re expected to do.
Hiring friends and family is another road that most small businesses should avoid. While these might be the people you know and trust, their particular skills for the specific job roles might be unknown to you.
Employers often hire their friends or family to do the work for lesser pay, but it may lead to a dysfunctional team. Moreover, it may bring morals and personal relations into the mix. Hence, it is always best to keep personal and professional lives separate to make sure the two don’t overlap and plunge you headlong into chaos.
2: Reckless spending
Upgrade! Upgrade! Upgrade! – This might seem like the mantra when looking at business growth and success from the outside. But beware, there is a lot more to read between the lines.
A fundamental mistake that small business owners and startups should avoid is upgrading their office right after getting the first round of funding.
It surely is an important part of a business, however, at this stage, it is essential to first think about developing your product or service. Understand how that affects the market before thinking about upgrading to a shiny new office.
Ask yourself, what is the most important and beneficial step you could take that’d help your business at this point. Is upgrading to a bigger office that important?
After having a proper thought-out product development plan, the next step would likely be marketing and sales.
There aren't any set rules when it comes to marketing; the best type of marketing for you depends on your business and your target audience. The mistake is assuming you don't need to market and that business will come to you merely by setting up a plush office and nailing down all the physical aspects of your enterprise.
You don’t need a three-floor office to get your consumers to know about your product/service, a lesson that many businesses are learning the hard way now due to the COVID-19 pandemic. A digital advertising campaign run by employees working from home, who catch up once a week in the physical world and stay connected through video calls, can be more than enough to get across to the right customers.
Beepi.com, a company that managed to accrue $60 million in the Series B funding round, shut down after four years. The fundamental reason behind Beepi’s failure was mismanagement and a lack of direction. Due to bad leadership that did not have a solid business plan to follow, Beepi made several bad investments and soon found themselves on the brink of bankruptcy. At one point, the startup was shelling out $7 million merely on salaries and other unnecessarily luxuriant purchases, such as a $10,000 sofa for its executive office. (2)
3: Relationship with the investors
After getting funding, some owners ignore the fact that it is important to keep the investors updated on the progress of the business.
It’s imperative to have meetings to update the investors on your progress and even ask for help or advice whenever required.
Investors are expecting startups to build a trustworthy relationship with them and integrate them as a part of their growth story. Most of these investors have already experienced the situations that you may be in at any point in time during your journey.
It also helps in securing future funding and in building a secure foundation for your business.
Communication is absolutely necessary.
Good and consistent communication can portray a fair image of your business and your integrity in the investors’ minds. Completely ignoring them after getting your funding may make you seem callous and can also result in missing out on some seasoned assistance.
Building a strong relationship with your stakeholders may seem like basic knowledge but it’s quite common for small business owners to make this mistake.
Call9, with a total funding amount of $34 million, failed in a couple of years. According to insider information from the startup’s financial team, a strained relationship with one of the main investors was one of the key reasons for this startup failure. (3)
4: Lack of a proper business plan
Think about it like this. What would happen if you go for a drive, having a destination in mind but no roadmap or direction?
Of course, you will get lost.
Similarly, after having received funding, sometimes startups forget that a proper business plan is needed to budget the treasure trove of investment that you have chanced upon.
The goal is to make the spending most profitable, but without proper planning, your happy train could easily derail. Ideally, a proper budget for marketing, sales, customer research, product development, and other verticals should be meticulously planned.
Any way you choose to look at it, a blueprint is absolutely essential!
Having a proper business plan has another benefit. It helps in educating your employees on the bigger picture, which is one of the most effective ways to motivate them to do their best.
A common myth is that a small business could function without proper planning. The below case busts this myth.
The lack of a business plan can cause startups to encounter lethal gaps in scaling up their product/service offering. One example is that of Aria Insights, a drone company that developed a promising way to collect data but did not think ahead to how this data can be used. They soon found themselves falling deeper and deeper into obscurity due to a lack of a roadmap for their product. (4)
5: Not having proper bookkeeping practices
The flow of funds in your business is your organization’s life-blood and hence, it is essential to keep a perfect record of all the incomes and expenses that occur.
Keep your accounting books in perfect order and don’t forget to enter even the smallest and pettiest of expenses to the record.
It helps to have a better understanding of the working capital required for the business and the cash flow. Bookkeeping is an easily neglectable aspect among startups and hiring accountants is a process that most small business owners avoid.
However, it is necessary to have a proper record of daily accounts. Nowadays, there are numerous software and digital tools that can help you automate and simplify your accounting functions.
From a time when it boasted of over USD 100 billion in cash inflows and up to 29,000 employees, Enron went from riding high on success to filing for bankruptcy all within a single year. The core chink in their armor, which widened incredibly fast was essentially bad accounting practice. Erroneous accounting practices and loopholes were being used by the folks at Enron to obscure debt that ranged in billions of dollars. (5)
It is a good accounting practice that will help in determining regular taxes to be paid and in everything from mapping out requirements of funds in the future to the prospect of being able to get loans easily. They are also the quintessential tool for uncovering avoidable expenses and thereby, also preventing other, more costly mistakes.
For instance, legal documents required for daily contracts can be easily obtained and made without hiring professional lawyers, which might seem like a good investment when the rest of your expenses are hidden from your immediate purview.
6: Scaling up too fast
Having acquired seed funding, startups often get obsessed with showing “results” to the investors.
They become overly invested in showing numbers and trying to scale up too fast, so they start looking at short-term growth methods, such as spending a lot of money towards advertisements, running PR campaigns, or giving out deep discounts that are unsustainable in the long run.
While this may bring some good short-term results in terms of acquiring new customers, more often than not, it fails in the long run once the money dries up. This is because the initial customers that were acquired by giving out discounts and coupons might not turn into loyal customers.
Layer Inc, with about $44 million in funding, shut down because of the pressure from investors to take major leaps. This caused the startup, which had a lot of potential, to overstep its initial abilities and plunge headlong into competition with giant companies.
Failure was imminent and their fate was sealed. (6)
Hence, in the initial stages, it is more advisable to spend money on developing your products/services that will automatically help in improving consumer loyalty to your brand and company in the long run. Remember, it is very important to scale up a business gradually so that it is both sustainable and can become eventually profitable.
Starting a business in itself is not an easy feat, and to manage it and keep it running gets more and more complicated. However, there is always the opportunity to consider and learn from the startup failures of the past as this is, in many cases, the best advice out there.
About the author:
Kartik Satija is the founder of Seven Bosses, which is a community to mentor, guide, and help people when they are stuck in their career or business problems. He talks about guides, how-tos, software, videos, and also answers personal questions through the Ask a question page on his website. Connect with Seven Bosses on Facebook and Twitter.