For a start-up to be successful, it is important that it establishes good product-market fit, is led by a great team and has brilliant marketing and competition strategies. But, to be able to accomplish any of the above, it is important that the start-up has enough funds. A CB insights study shows that running out of cash is the second most common reason for the failure of startups, with nearly 30% of all startups falling prey to this.
Securing funding is only the first step to establishing a good runway for the startup. A Nasscom report shows that 50%-55% of startups fail even after securing seed funding. A cash-smart strategy needs to take into account multiple internal as well as external micro and macro economic factors.
Locking in the right funding source:
All funding sources are not equal. Important as it is to secure funding, it is even more important to ensure that it comes from the right source. There are three main modes of securing funds, each with its own pros and cons.
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Venture Capital:
If your startup is in a nascent stage and has not yet built a significant customer base or brand presence, it makes more sense to go for VC funding. This mode of funding frees the founder from any repayment commitment, which is a huge advantage when the firm’s growth and cash flow are still unpredictable. In addition to risk-free capital, VC funding also provides good PR for the startup and mentoring of the young team. However, this investment comes at the cost of equity in the startup and the sooner a startup trades equity for capital, the less flexibility it has in negotiations in further funding rounds. Along with the capital, come steep targets which put pressure on the business and reduced autonomy in decision making for the startup founder/s.
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Small business loans:
If your business is a recognized brand along with strong cash flow and an established business model, it may make more sense to secure a business loan and hold on to equity. This mode of funding works well for businesses that are already successful and require cash for scale up and growth to fulfil higher demand. Many startups typically start off with VC funding in the first couple of rounds and then move on to debt funding when they are confident of consumer demand and paying back loans is not an issue. With the advent of Fintech firms, securing loans has become a quick and seamless process.
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Crowdfunding:
If you want to validate your business idea before taking it live, crowdfunding is a great way to do that while raising money at the same time. Most crowdfunding campaigns promise a reward to ‘donors’ if their target funding is met and hence, do not have to part with equity. In addition to getting capital, crowdfunding also builds a base of fans who believe in your idea. However, crowdfunding is not an easy process – it involves creating detailed plans, well thought out rewards, a perfect pitch and social campaigns and can in itself be a full time activity.
Automation and outsourcing:
A smart way to optimize business expenses is by relying on technology and automating repetitive, human intensive tasks. Reliance on latest technology can help in cutting manpower costs with options to scale as your business grows. Similarly, outsourcing support tasks to other firms can reduce the time and cost required to build an in-house team. A great example of this is the customer support function, which is critical to the success of the firm but can be efficiently managed by cloud telephony applications. There are several suitable tools that come with sophisticated functions like IVRS, call transfer and virtual receptionist features and can be customized as per business requirements, while costing only a few dollars a month.
Incorporate in the right geography:
Once you have the required funding, it is imperative to locate the right geography for your business. While it may make sense to have your distribution centers close to consumers/suppliers and tech office where workforce is easy to hire, you need to ensure that the startup is incorporated in the state that offers the best long-term economic advantage. This should take into account several factors like taxation rate, median wages, cost of living & real estate, business survival rates etc. Based on one study, Texas and Michigan emerge as top candidates for ideal business locations.
Adapting your business model for the best ROI:
Most entrepreneurs stop at optimizing their procurement rates and pricing strategies for ROI improvement. However, there is a huge opportunity to improve ROI and hence, cash flow by either reducing the Customer Acquisition Cost (CAC) and increasing the Revenue Per Customer (RPC).
Firms can rely on organic, non-discounted customer acquisition strategies during periods of high demand. However, CAC reduction should be done carefully and not at the cost of the rate of acquisition of new customers, especially in a hyper-competitive market.
On the other hand, increasing RPC is a sustainable way of improving ROI. Launching a subscription model is a great way of locking in customers and ensuring high purchase frequency. In such recurrent billing models, the business spends once on customer acquisition, but recovers the cost manifold over subsequent periods. There is also predictability in demand, leading to better planning and inventory management. Recurring billing models are more challenging to operate and require tools to help with smooth operations – invoicing, payment and transaction management, special offers, communication and customer support.
To ensure your cash flow never dries up, it is necessary to create a water-tight strategy right from deciding on the source of funding and identifying the right location to having the right business models and automation support.