I've met my fair share of entrepreneurs over the years. Some have gone on to be very successful, while others fell victim to all-to-common startup mistakes. And while each entrepreneur's journey is unique, from what I've seen and through my own experience, most fatal startup mistakes boil down to one thing: money.
There's never enough money or what you have is gone too soon or spent inefficiently. And the reality of business is that without cash, even the best idea is dead in the water. If you want to avoid falling into the same trap, you need to know about the financial startup lessons learned by others.
Here are three ways startups burn through money quicker than intended:
1. Hiring inexperienced people
Get one thing straight: experience in the corporate world does not equate to experience in the startup world. Many skills are transferable, but a great startup employee needs to have a particular mindset that isn't often found in traditional companies. They need to be prepared to work quickly and for long hours. And they need to be willing to take on responsibilities outside of their defined job description.
Unfortunately, many entrepreneurs who begin bringing on team members are blinded by the excitement people exude about their idea, and they miss crucial red flags. For example, a 2014 survey by Robert Half Technology found that only 16 percent of tech employees actually prefer working at a startup rather than a more established firm. So don't just look for employees who think they want to work as a startup, but ones who know they do.
As you build your team, look for experts who have been in and understand the startup world. If you come across someone you're not sure about, offer them a temporary contract or one-time project as a trial. This way, you can determine if you can count on them and avoid the costly mistake of having to constantly find and train new employees.
2. Going about product development the wrong way
For many entrepreneurs, their idea is their baby. In their eyes, the idea is perfect just as it is and all they need to do is nourish it so it can reach fruition. One problem: entrepreneurs are not the target audience of their company. In fact, in most cases, you're one of the last people who should be determining what the end product will look like. Because if that's how you choose to develop your product, chances are you'll dump the majority of your money into something no one but you appreciates.
The Top 20 Reasons Startups Fail report from CBInsights found the number one reason startups go under is a lack of market need. Forty-two percent of startups fail because they don't consider who would want their product during development. Instead of making this mistake, take a different approach.
My company, Coplex, a startup studio that guides companies through the launch phase, swears by the agile and lean development process. This methodology is based on the idea that you need to test market demand along the way through a series of small experiments that guide your next steps. In other words, you make an assumption about what the market might want from your product, then see if it's true. If it is, you move on to the next step, if not, you look at what you've learned and adapt.
By following this process, you are upping the odds that your final product is something people want. Its viability has been tested and proven each step of the way. And while you might have had to take a few steps back when something didn't work out, it's a lot less costly than reaching launch and discovering all your work has amounted to nothing.
3. Moving at a corporate pace
Corporations move inexcusably slow. Every decision needs to go through several levels of approval and full execution plans need to be created before the first step is ever taken. Startups don't have that luxury.
Deciding what your company logo is going to be and planning out every possible feature of your product is unnecessary when starting out. Not to mention, it requires a lot of time and money to figure those details out. If you follow the agile startup methodology, you'll see what deserves a chunk of your budget and what can wait.
Also, remember the 80/20 rule. This is the principle that 80 percent of extraordinary results come from just 20 percent of causes. So, instead of wasting time and money trying to get every puzzle piece in place, concentrate on the ones that give you the clearest view of the big picture.
A great way to accomplish this is to approach each decision from this perspective: will dealing with this aspect of the business slow us down or drive us forward once we've found the solution? Anything that will require more time than benefit is one to avoid at the beginning.
There are many startup lessons learned the hard way. But ones involving money can often be avoided with a little bit of insight. You just need to look at where so many others have fallen and be ready to make better choices.
What are some other tough startup financial lessons entrepreneurs need to know? Share in the comments below!