For eight years I’ve been studying what startup entrepreneurs do and don’t do during the first 18 months in business that may dictate their fate.
In one way or another, every significant business problem that challenges startup entrepreneurs involves cash. Entrepreneurs who are fearless and passionate about earning, collecting and protecting their company’s cash are going to stay in business longer than entrepreneurs who don't appreciate its almighty significance to sustainable business operations – that is until it’s too late.
Here are my top five cash-related attitudes and actions of successful entrepreneurs.
No. 1: Fund more than your startup costs. Perhaps one of the more serious judgment mistakes startup entrepreneurs make is they scrape together just enough funds to “start” their business, but don’t secure enough funds keep the doors open until the company is sustainable. The situation is similar to starting out on a three week mountain hike with only two days of food and supplies. Entrepreneurs who beat the odds of business failure are practical and risk-adverse. They don’t start out until they have enough resources in hand to reach one or more key milestones of financial safety, such as cash flow breakeven.
No. 2: Invest low. Buy low, sell high. This is the American Way. Unfortunately too many of America’s small businesses are “underwater.” No, this doesn’t mean their businesses are the victims of hurricane flooding, but another form of financial catastrophe. Like the 2008 collapse in the residential real estate market, owners of underwater businesses invested more cash in their companies than they are worth on the open market.
The more cash you invest in your business, the more your company has to perform in order to earn a positive financial return on your invested cash. Successful entrepreneurs know that it is easier to double, triple or quadruple the value of a $10,000 investment than a $100,000 investment in a startup company. They also understand the harsh reality that just because you may invest $100,000 in a business, doesn’t mean that anyone else will ultimately buy out the business for the same amount or more.
No. 3: Resistance to spend. Businesses close when they run out of cash. Owners of enduring businesses barter, haggle, and second guess all potential expenditures. To save cash, they work out of their homes, test workers as part-time 1099 consultants before committing to salary and benefit obligations, favor conference calls to travel, make do with used equipment, and avoid making long-term financial commitments to landlords until their businesses achieve several milestones of consistent revenue generation and profitability. These penny-wise entrepreneurs also don’t sell products or services to customers who don’t pay their bills on time.
No. 4: First customer focus. Successful startup entrepreneurs understand “first things first.” They direct all of their attention to securing their first paying customer rather than their first 1,000 customers. In practice, this means that if you want to create a successful fashion label and company, your first step is designing and producing a first garment for a first paying customer.
No. 5: Adapt quickly to first customer feedback. Businesses that persevere into their second and third year of operations test, tweak, and test again. They would rather learn what their target customers are willing to pay for before investing in a big product launch, rather than after.
No business owner should ever say, “I put everything into my company.” It’s how startup entrepreneurs lose their homes, their savings, and their self-worth.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.