Becoming a 10 per center: The winning formula for start-ups

tips

Congratulations … you’ve just closed your “Series A round”, raised $5 million and this capital raising has been published far and wide for all to see. You’ve received plenty of congratulations and pats on the back and you just can’t wipe that smile off your face. Well done. Now, it’s time to consider your costs and organisational structure:

  • Do you really need ALL those 28 employees?
  • Are you absolutely confident you need a full-time in-house designer?
  • Are you sure you need an army of IT personnel?
  • What about that fancy office space in the heart of the Sydney CBD?
  • And that ping pong table that you believe makes all the best and the brightest want to work with your company? Do you really need it, or do you just want it?
  • All those other little perks and cutesy incentives … are they essentials that add value to your business or are they just self-congratulatory whims?

When 90 per cent of all start-ups fail (that’s nine out of 10 by the way), creating a successful business not only requires a winning mentality, discipline over costs is an important part of it.

In the beginning entrepreneurs start with an idea and work extremely hard to find solutions and deliver the working prototype or, in an even better scenario, a market-ready product. Then they go about raising some serious capital, millions of dollars. However, in many cases they did not have their own businesses, and nor do they have strong corporate experience in senior roles, so what happens when they have those seven digits in the bank account?

The sad truth is they don’t know how to manage their money and they fail to recognise that when the money runs out and they are forced to bring their capital raising forward, this means they will need to give another significant piece of the company away. To put it simply, when they start wasting money on frivolous items like ping pong tables or unnecessary staff like a full-time in-house designer, they are actually wasting their own equity.

One prime mistake many start-ups make is to lease over-priced and over-sized offices in prime locations, for example, offices within walking distance of Circular Quay. Another is being tempted to become major event sponsors simply to get their names out there and impress their mates at the footy.

The point is that it is often very difficult to assess the success of sponsorships and many inexperienced entrepreneurs need to think carefully about where to place their money. Unless they are very confident they will get strong return on investment (ROI), they should leave it in the bank or direct it elsewhere. Sponsorships that might serve well-established and well-funded companies might not be the best solution for a small start-up.

Also, every additional unnecessary employee, and even the difference between part-time or full-time, is another piece of the company they are giving away. Every additional square metre in the prime area of the Sydney CBD is less time to generate additional revenue. Every time they spend unnecessary money they are increasing their burn rate and instead of trying to use funds for a longer period of time, they are frittering them away.

The majority of start-ups do not succeed simply because they run out of money. And there is nothing more likely to turn a potential, and current, investors off than getting out the begging bowl. If the bowl is out then, he says, you’ve left it too late because all they will see is someone who can’t look after their money, has frittered away their cash on unnecessary items and is now desperate for more funding.

The maths is simple … if you spend more money than is necessary it has an impact on the success of the business. The higher the expenses, the harder it is to get to the breakeven point (where the revenue covers the expenses and the company is no longer losing money). It means you have to generate more revenue sooner than expected or it could mean you simply do not have enough time to generate sufficient revenue and the company will fold.

So, ask yourself, do you still have the winning mentality… do you really need that enormous office with the coveted views of Darling Harbour and the pinball machines in every corner?

Doron Peleg, CEO, RiskWise Property Research