Running Out of Cash – Reason #2 for Startup Failure

Categories: Risk Managment, Startup Failures, Uncategorized
In our last post, we talked about the #1 reason that startups fail – solving a problem that doesn’t exist (referred to as “No Market Need”). The second reason listed in the September CB Insights report was “Running Out of Cash”. There’s not a lot of context here, so let’s look at what causes “running out of cash”. The report doesn’t illuminate whether the startup ran out of capital to invest in product, or whether the lack of cash was to sustain operations, or to grow the business to a critical mass where it could support itself. A lack of investment capital is often a mark that the startup is actually experiencing startup failure reason #1 – they are building a product or service for which there is no market need. Alternatively, maybe there is a real need, but the team that has assembled to address the need cannot get traction with investors – either they are not perceived to be capable of making the company work, or maybe they lack the ability to tell the story effectively. Either way, the investment decision often comes down to belief in the Management Team. A super product cannot be brought to market by a substandard team – and whether or not that team is substandard is all perception. If the problem is operational cash, it may be that the entrepreneur in question just does not have good business management skills and cannot anticipate what the sources and uses (especially uses!) of cash are, so they are surprised when they suddenly don’t have enough cash to continue operations. Understanding the burn rate of your business, and managing to avoid surprises are important skills to have for this. Understanding when to add staff, when to increase overhead, when NOT to do these things, are important, and can often be solved by bringing established business acumen into the startup. After all, the initial founding team often does NOT include established business skills. But this also does not mean that founders need to hire people to run the business. The founders absolutely have to continue to be involved, and come to understand how the elements of the business work together. Many times, what the founding team needs is coaching or advising about what tools to use, how to use them, and when to use them. This is a better approach than handing these elements of the business over to someone else. Finally, maybe the startup runs out of cash because they have plateaued in a part of the growth curve that is not sustainable. They are acquiring new customers, but the acquisition cost is too high, or the customers are leaving before they attain the targeted lifetime value, causing increased churn. There are a lot of reasons why the business itself might not be running optimally, and these can either be minor annoyances, with easy fixes, or they can be devilishly difficult to ferret out and fix. Either way, a fresh set of eyes looking at the problem is often helpful in figuring out how to tune the business. The problem of running out of cash usually boils down to “No Market Need” (Reason #1), or failing to deploy the cash you have in the right ways at the right times. What are your thoughts on this? Let’s chat

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