#1 Focus on the wrong numbers
Entrepreneurs commonly focus on revenue growth as the sole indicator of success, when they should look toward granular financial data. Revenue growth will indicate whether or not a company is on track, but won’t yield the data needed to properly allocate resources and grow a company.
Entrepreneurs need to understand how each dollar is derived. For instance, average revenue per customer (ARPU) gives a general look at the financial health of a company and can be used to measure against a peer group. But analyzing high revenue accounts will provide valuable data on a company’s most lucrative customers.
Cost Entrepreneurs should set guidelines around their cost of revenue to ensure a timely break-even.
Example: If annual ARPU is $100, but customer acquisition cost (CAC) is $200, there might be a problem. Depending on the industry and capital constraints, entrepreneurs should recoup costs within 12 (software) to 36 (ad-based models) months.
Geography Once an entrepreneur has determined that his or her most lucrative customers are based in several geographical areas, highly-coveted resources can be focused in these key areas.
Example: When committing to a store build-out or in-person event, understanding the location of top customers is critical for success.
Source When an entrepreneur knows that the bulk of his or her customers are coming from a few key channels (social media, affiliates, strategic partners, etc.), relationships can be further developed.
Example: When executing an advertising campaign, understanding the most lucrative channel partners will allow entrepreneurs to spend their advertising budget wisely.
Know your numbers.
#2 Focus on external, instead of internal, capital
Entrepreneurs spend a great deal of time focused on outside capital (which is dilutive) instead of internal capital (which is non-dilutive). Ironically, the higher the internal capital (i.e. revenue) the more attractive a company is to outside capital.
Whether a company is seeking venture capital dollars or seed funding from an angel investor, showing strong revenue will increase valuation and bolster its chances of raising capital. Additionally, accepting too much external capital at a low valuation can dilute a company and leave the founders with a small piece of the pie.
Example: On average, a company takes six to seven years to go public and may require three to four rounds of funding. Each round of venture capital funding will require 20% to 30% of the company’s equity. If a company begins receiving outside capital too early, and at a low valuation, they may overly dilute their equity by the time they go public.
The best money you can raise is from your customers.
#3 Focus on unsustainable growth
Growth is rightfully perceived as a sign of success. Yet if a company grows too quickly, it is bound for failure. Entrepreneurs who follow a boom and bust cycle of expansion and retraction create low morale for staff and uncertainty for customers. This inevitably ends in failure.
Entrepreneurs should develop a financial model with scenario analysis to obtain a realistic picture of the future. Steady and consistent growth ensures positive relationships and sustained operations. Rapid expansions during good times are short sighted. A company should grow at a conservative pace if it wants longevity.
Example: There are various examples of companies that grew too fast – Pets.com, Washington Mutual, and Groupon – and the common thread is that they thought the good times would never end.
Slow and steady wins the race.
This post originally appeared on Atelier Advisors. Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs. All AlleyWatch readers are automatically eligible for a 50% discount on either of the courses using the preceding links.
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