The startup world is a world of extremes. It’s one where failure is not only an option but often times it’s expected. There are many reasons for this, but the most prevalent reason is simple: there’s a race to burn cash.
Start ups are burning cash because they’re spending money before they have any revenue to show for it. This may sound like a bad idea, but there’s a method to their madness: The more money you spend on your product, the faster you will be able to improve it. The better your product becomes, the more likely people are to buy from you and refer others to do so as well.
VCs are encouraging high burn rates
VCs are encouraging high burn rates because they want a high return on investment from their portfolio companies. This means they expect these companies to grow rapidly which often requires a lot of upfront spending in order to get off the ground quickly and make an impact before competitors can catch up.
They want founders who know how to spend money fast and make it back later. They want founders who don’t have any qualms about spending money on things like office space, marketing, and sales people — even though those costs are usually seen as wasteful. In fact there’s a perception in Silicon Valley that if you’re not spending money fast enough then you’re not going to be able to compete with other startups who may be doing more with less.
Cash does not equal success
Cash is only one of the four C’s of business: Customers, Competition, Concepts and Cash. And while cash may be king when it comes to running a business, it’s by no means the only piece of the puzzle.
Cash flow doesn’t mean much if there aren’t customers paying for your product or service… or if there isn’t competition out there trying to take away your customers… or if you don’t have a good idea about how to sell your product or service… or if there isn’t enough cash in the bank to keep things going until things start turning around. In fact, many startups are successful despite having no cash at all!
Convergence of Ambition, Business Model and Strategy
Startup founders are ambitious, no doubt on that. They might have a great idea and they probably have identified a genuine gap that needs to be filled. However, bringing that idea to life requires a robust planning, formulating strategy, developing a solid business model and financial model. Many start up founders are willing to burn their personal investment, cash raised through angel investors and venture capitalists; which is not a problem in itself but the business model has to be sustainable and forecasts need to be thorough.
Quite a lot of startups have gone into deep troubles, some of them even forced to lay off hundreds of employees and even shutting down their businesses. Some recent examples include Quibi, Fast, LendUp, Airlift, Katerra, Swvl and the list goes on. One thing all of them have in common is that they wanted to achieve an abnormal growth rate without a sustainable business model and strategy.
Wrapping it up
Startups are crucial for economic growth of countries and societies therefore the ecosystem should not be undermined by a few persons or entities who failed to respect the process and foundations of a promising and healthy business. The startups should invest more into proper planning, strategic evaluation, creating a strong business model and then venture into spending the investments raised so that the investors are well-rewarded for the risk they take and trust they put in the ecosystem.
A professional business consultancy can go a long way in achieving long-term targets of a potentially viable business ensuring continuity and sustainability of startups.
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