In my role as an advisory board member for several startups, I am always excited to see that initial surge of revenue from a great rollout campaign. Unfortunately, many passionate entrepreneurs read this initial surge as success, and charge ahead with more of the same passion, leading to a series of potential pitfalls that can quickly jeopardize the health of the entire business.
For example, early social media startup Friendster was so enamored with their early acceptance that they turned down a $30 million offer from Google, then quickly ran into money woes and tough competition. Napster created the free music sharing craze back in the nineties and found great acceptance, and ignored the legal pushback by content owners, only to lose it all in the end.
Early success is great, but it is only the beginning of your hard work. In addition to the visible failures mentioned above, there are many less fatal, but critical pitfalls I see all too often that every entrepreneur can avoid with some careful planning of ongoing attention:
1. Separating profitability from cash flow and managing both. An initial revenue surge, or a major cash advance from investors often leads to a mentality of building a large customer base at any cost. It is easy to forget how quickly cash can be burned and how hard it is to find the next round. Keep your focus on business health through profitability.
2. Assuming you can keep all relevant financial data in your head. At the startup entry level, most entrepreneurs find little need for Profit and Loss statements and Income statements — they know all the key transactions. As the business grows, it pays to learn how to use automated financial tools, and review the key financial metrics daily.
3. Watch for margin erosion as real operating growth costs kick in. As the business grows, new overhead costs, including health and liability insurance, office administration and payroll taxes. On the other end of the transaction, customer support, returns and transportation can add up. Prices need to be reviewed to cover total costs and margin.
4. Failure to follow-up on customer receivables delays. Most businesses expect payment in 15-to-30 days, but some customers will assume they can extend this period to 45 days or more, or until they receive a late payment prompt from you. Revenue does not flow into your business based on invoices sent, but only on checks received and cleared.
5. Too busy to focus on hiring, training, and managing employees. Hiring the wrong people, or not training them, will destroy your business faster than running out of cash. Since first-time entrepreneurs rarely have experience in this area, I recommend extra training for all executives, and the use of an outside advisor to focus on this requirement.
6. Delegating cash flow management to your accountants. With the crush of new business, many startup founders delegate cash transaction management to their assistant or accountant, while they focus on finding and satisfying customers. Well-meaning and diligent assistants can kill your business by over-ordering and early paying.
7. Continue to operate without documented and repeatable processes. As any business grows, you need help to make it happen, and new employees do not have the background knowledge, training or the problem-solving ability you have developed. They need written processes and measurements to get the job done right.
A great vision, and the creativity to develop an innovative solution are necessary but not sufficient to build a great business. When the first wave of customers finds you, and the revenue starts flowing, a whole new set of disciplines must kick in to keep the momentum going. With new disciples come the new pitfalls listed above, which can undo the entire initial market acceptance.
My recommendation is to bring in some experienced business professionals at this point, who understand the challenges and realities of sales, marketing, personnel, finances and operations. As an entrepreneur, you need their help in managing people, processes, and finances, and they need your vision and direction to change the world. That is a win-win combination for everyone.
Image credit: CC by Joshua Tree National Park