Top 5 Reasons Why Promising Startups Fail

 

In the world of startups, death is a recurrent theme. 9 out of 10 startups crash and, invariably, money surfaces in all these cases. Many startups go bust either due to their inability to scale up or their product does not perform well on the customer’s expectation scale.

I have tried to investigate why these promising startups have failed this year. The purpose is to learn the lessons, avoid repeating those errors and move on to build a new startup.

  1.   Start-Raise-Hype-Raise^5-Burn^10-ShutShop

In 2013, a used-car startup Beepi was founded in San Francisco. Beepi provided the used-car market with an online platform, which would change the face on online car selling. Within two years, they went from nothing to a valuation of $525 million. The customers were happy to respond and venture capital poured in. However, their ‘untested’ business model, inclination to spend recklessly on a fancy office (SoMa) and high salaries spelled their doom. Then, in the beginning of 2017, they were sold in parts to pay off the investors.

 

  1. Crowdfund – KickstarterProject – Raise^20-Hype-Still-Not-a-Company

Hello was a sleep-gadget startup. The business model was built around Sense, an orb-shaped, bed-side sleep tracker, last priced at $149. In a crowdfunding campaign worth remembering, Hello raised $2.4 million, which was followed by an investment of a total of $40 million in venture funds from a Singapore-based investment firm, Temasek, and high-profile angels in 2015 at a valuation of $250 – $300 million.

The media loved to shower James Proud, Founder, and CEO of Hello, with attention and for a few reasons: One, he was young and was from the inaugural batch of Thiel fellowship, where Peter Thiel pays a group of college students to drop out of college for pursuing a career in entrepreneurship. The crowdfunding campaign by Proud was, by far, extremely successful. He had ventured into a trendy category, known as the ‘sleep and had an early-mover advantage’.

Still, before its closure, the company desperately tried to sell itself to Fitbit. The deal didn’t come through and Proud had to bid goodbye to Hello in June 2017. The reason why Hello was put to sleep comes from Proud, “The secret to making a successful tech product is to create something that works so well it fits naturally into your everyday life.”

Obviously, Hello faltered whereas Google Home and Amazon Echo continue to improve and gain traction. And Apple itself introduced HomePod in the same month.

  1. Startup Fundraising Mistake-Shut Shop

There is a time to raise money. Too early and the equity goes for a toss, too late and you are out of business.

Nearly three years ago, a restaurant reservation startup Table8 Dining Club (aka Table Now) set out to democratize the dining experience. They partnered with top restaurants to offer premium tables at peak, sold-out times at a fee of $20 and the reservation could be made weeks or hours before the meal. The fee was split-up between the startup and the hotel.   

The erstwhile San Francisco-based startup was founded in 2013 and they raised $4.6 million in funding. However, their inability to secure more funds pushed them out of the business, reported the note on their website.

  1. Startup-Strategy Error – Shut Shop

Investing 101 says diversify, diversify, diversify! Mitigating risks is crucial for a startup; more so, if the risk is a big client who eats up all your time and energy and weighs you down with an unequal contract.

Rather than being a business, you end up being a contractor to the client and the moment you lose that deal, your entrepreneurial dreams meet an unnatural death, like Audience Science. Audience Science was an ad-tech company known for building software and tools that are designed to help major marketers buy digital ads programmatically using a combination of automation and data. They were dealing with P&G, who was their major client. However, when P&G let it go, the writing for them to exit was on the wall.

“AudienceScience dedicated most of their energy to servicing P&G, and they jettisoned their media business, which was funding staff and development, to focus on growing their DMP business,” Ramsey McGrory, CRO of Mediaocean and former head of the Right Media exchange, told AdExchanger. “Taken together, it was a high-risk/high-reward strategy that didn’t pan out.”

  1. Startup-Raise-Hype^10-Burn^20-ShutShop

Claes Loberg co-founded Guvera, Australia-based music streaming startup with co-founder Darren Herft. In the span of 8 years, Guvera raised 185 million from self-managed-superfund-membership (SMSF) investors, through Herft’s investment vehicle, AMMA Private Equity.

The nature of streaming music business is such that it comes with considerable costs, mainly in licensing deals and technology. Co-founder Darren Herft accepted in an email that $50 million went to music labels and a large chunk went towards product development. Moreover, the ‘House of Guvera concept in Los Angeles, big-bang music launches, hefty salaries of the founders and commissions to Herft’s private equity fund also burnt a lot of cash.

The only way out for the company was to go the IPO route to raise more money, but Australian Stock Exchange last year blocked its initial IPO offering of $100 million.

The ASX said it has “exercised its discretion” to refuse admission to Guvera, based on material contained in Guvera’s application for admission.

Founder, Claus Hoberg, walked out of Guvera and blamed Darren Herft and the AMMA Private Equity for the company’s demise. Breaking his silence for the first time after the firm’s spectacular fall from grace, he said,

“The most important (lesson) is to choose your capital partners wisely.”

Startups are unpredictable, but still, there is a method to the madness. The companies that choose good co-founders, focus on building better products for their consumers, raise money wisely, and spend it modestly, succeed.

The Beginning of an Inclusive Startup

 

Last week, I talked about how Silicon Valley and the tech industry, in general, is biased against women.

It was to battle this that myStartUpCFO was started. In August 2013, we began with the social objective of integrating women back into the workforce, without robbing them of family time. We actively work towards closing the stark gender gap, where a woman is not made to choose between a booming career and an equally demanding personal/family life.

Over the years, we’ve observed that women often quit work to raise their family. As they move out of the workforce, they tend to lose part of the skill-sets that they had earned with so much effort: negotiation, analysis, math, logic, and collaboration. As a result, the company loses a dedicated employee, mainly because of domestic difficulties. She also ends up unhappy because she had to give up a thriving career to bring up her family. Why choose when both are possible?

At myStartUpCFO, we believe that the idea of working along a timetable is an industrial era concept and doesn’t work in today’s digital world.

As a result, we provide a virtual and flexible office which helps women stay in the workforce, even when family or other externalities demand more of their time. Our workforce is predominantly women and they have complete flexibility to work from home. This also allows us to tap into talent outside of a 100-mile radius.

If you can’t trust your employees, why hire them in the first place?

This is where it all begins. We enable our employees to work within the framework of the company guidelines but with the ease of timings that suit them.

The benefits of such a setup are manifold:

One, it tells our people that we believe in them, and we trust them to do a competent job without a lot of handholding. This pushes them to deliver, to be resourceful, and figure out problems on their own without escalating everything to their supervisor.

While building higher capacities, it also maximizes productivity and minimizes attrition: two of the biggest challenges most companies face.

It also brings our overheads down, the ones pertaining to a physical office space, allowing us, in turn, to offer the cost advantage to our clients.

However, I’ll be the first to admit that this setup is not without its share of challenges.

With about a hundred people spread across the globe, it’s difficult to foster a close-knit culture and encourage open communication. People often don’t feel a connection to the entity and lack an informal channel to share.

We are actively focusing on initiatives that will encourage conversations: from a company newsletter bringing the latest on-dits from our different units across the world, as well as Google+ Communities to mentor, guide, and foster a deeper connection.

If any of you here are dealing with the challenges of a remote team, or has questions about how this would work in practice, I’d be happy to talk, and help avoid the pitfalls that nearly got us the first time we did this!

At myStartUpCFO, we are proud of the supermoms that work with us, and we happily tell our clients to expect crying kids and barking dogs in the background when on a call with our teams!

Why is Silicon Valley so biased against women?

Gender disparity in Silicon Valley is topic du jour. So when a few days ago, Wall Street Journal posted a piece titled “Facebook Blames Lack of Available Talent for Diversity Problem”, nobody was surprised. According to the post, Facebook has come to the conclusion that their diversity problem is due to there being too few underrepresented people who have the necessary tech skills to work for them. So instead of looking for better talent, they are shirking responsibility and conveniently blaming the public education system.

The public outrage at their statement is immense.

 A woman studying CSE at Dartmouth blogged about the article, and here’s how she responded: 

“When I saw this article I had to fight back tears. I thought about all the work I’ve put into to get to where I am today and wondered will it even matter when I start my job search in a few months. According to most tech companies, if I can’t pass an algorithmic challenge or if I’m not a “culture fit” I don’t belong. I haven’t even started my first full-time job yet and I’m already so tired of feeling erased and mistreated by the tech industry.”

It’s a white man’s world!

Facebook is not the first company shortchanging minorities, and it won’t be the last. Google is still 70% male and 2% black. Twitter’s leadership is 72% white, 28% Asian. At Facebook, again only 16% of Facebook’s tech team is comprised of women.

Minorities in Silicon Valley have always got the short end of the stick. At first, they are grossly underrepresented, and if somehow they manage to claw their way in, they have to deal with overt sexism, the ol’ boys’ club, and a toxic atmosphere.  

In fact, in 2014, when Sam Altman, President of Y Combinator, wrote a blog post about sexism and diversity (or lack of it), men at Silicon Valley disagreed. “I got a bunch of guys who were saying to me, ‘It’s not a real problem’,” Sam said.

 Another case in point: when found guilty as charged, investor Dave McClure of Startup@500 quit and apologized publicly, but a fellow investor came to his rescue with defensive blog post that put the onus on women; conveniently side-stepping the original issue of the bias.  

https://medium.com/@coolbearcjs/i-just-watched-the-public-neutering-of-a-good-man-dave-mcclure-and-cannot-keep-my-mouth-shut-about-477898b9b506

Excerpted from a blog post by Chris Sweis, Bitcoin investor, where he makes it pretty clear as to who he blames.

This under-representation continues in funding trends.

As per a recent study by Pitchbook, it was found that Venture capitalists invested $58.2 billion in companies with all-male founders in 2016. Meanwhile, women received just $1.5 billion in VC money last year. This massive disparity is due both to the differences in the number of deals and the average deal size by gender.

Source: Pitchbook

“There is a disconnect between perception and reality,” Aubrey Blanche, Atlassian’s global head of diversity and inclusion, said in the report. “Despite good intentions to support diversity, when it comes to looking at what’s happening within their own companies, half of employees think everything is fine and no improvements need to be made on gender, race and other key areas — despite a mounting pile of evidence that tech is very much not a meritocracy.”

Going beyond Sexism

Things get worse when you look at discrimination beyond gender and into racial and ethnic heterogeneity. For example, while Blacks and Hispanics constitute about 13 and 16 percent of the American workforce, at no major tech firm do they make up for more than 5% of employees.

“Silicon Valley is still too white, too male, and too focused on solving the problems of the young, single, and wealthy,” agrees Owen Grover, the senior vice president and general manager of iHeartRadio.

There’s a bigger issue: the culture.

At present, all attempts at solving this problem aim at educating more women and minorities to make sure they stand shoulder to shoulder and challenging hiring practices. While these are important initiatives, the underlying issue stays untouched.

The truth is that gender and racial bias is so ubiquitous in the tech industry, and so resistant to change, that a lot of talented female and minority employees give up sooner than later and leave.

To validate this idea, Kieran Snyder, a former manager at Microsoft and Amazon and now CEO and co-founder of Textio, interviewed 716 women who held tech positions at 654 companies across 43 states. On average, these women worked in tech for seven years and then left. Kieran asked these women specifically why they opted out.

Some 192 women (27%) cited discomfort working in these companies. The overt or implicit discrimination was a primary factor in their decision to leave tech. That’s just over a quarter of the women surveyed. Several of them mentioned discrimination related to their age, race, or sexuality in addition to gender and motherhood. They also stated that lack of flexible work arrangements, the unsupportive work environment, or a salary that was inadequate to pay for childcare all contributed to their decision to leave.

The picture is grim. But things are a-changin’. We started myStartUpCFO with the objective of closing the stark gender gap and keeping them in the workforce at all costs.

But more on this the next time.

 

6 Mistakes Founders Make When Raising Funds

Raising money for your startup doesn’t have to be an impenetrable mystery, like whether your fridge light stays on when you shut the door. Every week, I meet people who still haven’t figured it out. In this article, I’ve shared some common mistakes I stop people from making.

The fridge light turns off. Next topic, fundraising.

  1. Too little, too late: In an earlier article, I mentioned that startups should raise more money than they need, or else risk becoming a #BurnRateZombie. We are part of a volatile ecosystem. It’s good to be prepared, especially when you’re starting out.

What most entrepreneurs also seem to forget is that raising funds takes time.

Even if you strike a deal, it could be months before the money is transferred into your account. Don’t ever stop raising funds. Continue to network and interact with the right people, even if you don’t need the money right away.

Most importantly, be mindful of your burn rate and runway. It’s easy to get so consumed in growing the business that you lose track of critical financial numbers. Watch your runway like a hawk so you can have your investor outreach strategy ready when you need it.

2. Too much, too soon: When it comes to fundraising, too often, people focus on the how, and not enough on the ‘how much’ and ‘when’.

We’ve heard horror stories of promising companies that get massive funding early in their life cycle only to die a quick and humiliating death. Color started off as a photo-sharing app that raised a whopping $41 million in 2011. This was before it had added a single user.

What happened?

It shut down months later in September 2012. The team was acqui-hired by Apple, but there was so much negative publicity around the app that Apple never even bothered with an announcement! Experts proclaimed that the product did not resonate with the customers. In other words, a bad product-market fit.

FYI, Instagram had raised a $500,000 seed round.

3. Selling yourself too low: Another drawback of raising too much too early in is the high probability of a low valuation. You’ve given away some equity as well, which would mean you no longer have complete control over your new business. You now have a lot of money, an iffy product, no real proof of concept, and someone you are answerable to. How would that work for you?

Remember this: A startup operates in two phases — the build stage and the growth stage. Funds fuel growth.

During the build stage, it’s important to stay lean, and not be controlled by VC money because it can often complicate things.

The problem is, when entrepreneurs raise millions, there’s pressure on them to spend it. VCs did not give them the money to accrue the savings interest. However, until the founders fully understand the market and how their solution fits into it, they can’t spend it in the right direction.

4. More money, more mistakes: When you have limited resources, you are forced to look deeper and make tough choices. It pushes you to negotiate harder on your office lease, or perhaps take a more frugal space. It teaches you how to stretch a dime to a dollar, and make each dollar work for you the right way. It will force you to keep salaries palatable in an inflated market, and will constantly push you to take decisions that bring you closer to your revenue model. These are hard decisions, and these hard decisions make for a solid foundation.

5. Don’t spray and pray: Don’t make the mistake of reaching out to every investor you’ve heard of. Do your homework. I’ve heard of startups at seed stage pitch to investors who don’t invest in companies that size or in that industry, only to be disappointed in the end. Save yourself the heartbreak and look for funding in the right places. Know your audience and speak their language. Are you trying to pitch a food delivery service to Mark Cuban? Chances are he will decline.

6. Consult an expert: Talk about being penny-wise and pound foolish. Some entrepreneurs decide not to get legal and financial help when signing term sheets to save a few thousands. How does that end? With a raw deal that could cost you a lot more than what you were trying to save.

Understanding the right valuation, pre- and post-money, in case of multiple funding rounds and what terms are actually good for your company requires specialized knowledge. Even before you speak to an investor, work with a good financial advisor to help understand what you need and deep dive into the numbers.

Got a question? Leave a comment.

8 Pieces of Advice for When Your Startup is Low on Cash

Originally published on Startups.co

***

In June 2013, I met the CEO of a data analytics startup here in the Bay Area. They had raised many millions already and I was on a mission to pitch them our services. However, as I stepped into their foyer, I was already filled with questions.

This was a handsome office for a company that had just raised a Series A round. Rather outsized, like a gangly teenager wearing his father’s jacket. Looked nice, but why does a small startup need a 5X office in one of the priciest real estate areas?

His answer caught me off guard. “I don’t ever want to feel cramped again!” he said, squishing his shoulders together.

Not far from this office, not so long ago, Steve Jobs had made a speech about “Stay Hungry, Stay Foolish”, and here was a company that got him exactly half-right.

I’ll let you determine which half.

This guy actually committed ~50% of the funds raised to the lease he signed for his “non-cramped” office. We never ended up working with this company, and needless to say, they ended at the auction block soon after.

Startup shows and the media flaunt the flamboyant lifestyles of entrepreneurs, and once the VC money hits the bank, this temptation is difficult to resist for even the saner ones out there.

If not personal extravagance, a lot of companies go on a wild hiring spree, or gleefully hand out big contracts to marketing agencies.

Founders often claim this defense: “But the money is raised to be spent!”

Of course it is. VCs did not invest in a Savings account. However, it’s important to figure out a scalable and sustainable business model first, before going out all guns blazing to promote a half-baked business with no product-market fit.

Mohit Bhatnagar, the Managing Director of Sequoia, agrees:

“In the new regime, startups are shunning previously popular buzz-phrases such as ‘growth over profit’ and ‘winner take all’ and adopting new ones instead — getting ‘unit economics’ right and reducing the ‘cash burn rate’.”

In an earlier article, I talked about watching the red flags that signal a #BurnRateZombie. Let’s now talk about how to avoid becoming one. Here’s how to rein in your spend:

1. Audit Subscriptions and Online Services:

I was going through the bank statements of one of my clients when I noticed that their AWS bill for the month was almost a $100,000. This was about 10X their usual bill and curious, I rang the CEO. He had no idea; he’d never even read the bill. After some legwork, we found out that every click on the website was spawning a new instance on AWS, and when we argued with the vendor, we ended up saving them $20,000.

Seriously though: read your bills. Especially for the online services you and your team has subscribed to. You need to make sure your licenses are only for the services you regularly use. Sometimes different employees authorize services to bill your card and then they leave the company, letting the billing continue for months or even years. There should be at least a quarterly audit checking the justification for each subscription, and an automated system to stop existing subscriptions when the person using them quits without bringing in a replacement.

2. Fire your Worst Clients, Not your Best Salespeople:

Don’t cut your best sales guys, instead fire your worst clients. 20% of your clients contribute to 80% of your stress. Focus your energy and effort on the good ones.

Good clients want you to survive. Ask them for an advance or best, a full payment on the bill they owe you.

3. Increase Performance Standards:

Firing your team is not an easy decision to make. Sometimes you might not even be sure whom to cut without affecting performance and team morale. Increasing performance standards might help make this decision easier.

4. Deferred Compensation and Salary Catch-ups for Employees:

If the situation is dire enough that you can’t meet the upcoming salaries of your key people, be honest with them. If they believe in your vision and sense a genuine opportunity, they might go for deferred salaries, freeing up your immediate cash reserves for more crucial expenses.

5. Fixed vs Variable:

Break down your burn into two subparts: fixed and variable. Fixed expenses are one you incur irrespective of the number of customer transactions. For example, salaries, rent, office equipment etc. On the other hand, variable expenses are directly related to your transaction volume. These are more flexible, because your cost moves proportionately with your revenue.

Try to keep fixed expenses at a minimum, and make them as variable as possible. For example, link a percentage of your sales team’s salary to a bonus linked to the business they bring in, or sign a lease agreement that gives you the right to expand your office at the same location, but doesn’t weigh you down if you don’t need the space right now. This will help you control the burn if business dips tomorrow.

6. Message Cuts:

Sometimes your team doesn’t catch up to the fact that you’re running low on money. They’re used to having free beer in the office fridge, Friday-night parties, and a daily gourmet lunch. You might have to get the message across the hard way: tone down the splurging. It might not make a big dent on the bottom line, but all the drops add up to make the ocean.

7. Be shy to commit to expenses that are difficult to reverse once committed.

Like a Vegas wedding that’s quick to get into, but harder to get out of, think of renting or leasing a big ticket item instead of purchasing it. Outsource instead of hiring in-house, to save money on benefits. This way, pulling the plug is also a lot easier if they don’t perform.

8. Quick Burn Vs Slow Burn:

Take the office space on lease, it will still burn your money, but slowly. Buy the same place and kiss that money goodbye forever.

Survival is tough. It is taking a series of decisions that go against consensus, and require continuously maintaining a shoe-string mentality when you have millions in the bank. It’s important to maintain this mentality consistently; cutting back after you’re used to splurging is very difficult. Like an always-broke college student suddenly on the payrolls of a rich company, who finds it impossible to go back to operating on his student budget.

Have you come close to becoming a Burn Rate Zombie? Which of these tips helped you survive? Share your story in the comments below.

Sava360 Interview with Sandeep Shroff, CEO and Co-Founder, myStartUpCFO

Who is Sandeep Shroff?

CEO and co-founder of myStartUpCFO Sandeep Shroff is making a name for himself and his startup… and, as you can see, it’s all in the name! myStartUpCFO essentially provides small businesses with on-demand full-stack CFO support. We all know that in the early stages of starting a business, there is so much focus on growth that sometimes the most critical pieces of business operations and financial controls get lost. That’s exactly why Shroff helped start myStartUpCFO – so small companies can get the much needed CFO office support without sacrificing already limited resources.

Added to its core operational mission is Shroff’s own socially conscious mission to have myStartUpCFO support and empower women and help close the gender gap in the workplace. In their 3+ years of existence, they have worked with hundreds of clients, from unfunded dreams operating out of a garage to companies that generate millions of dollars in monthly revenues. We’re especially happy to have Shroff offer his support for Sava360 and participate in our next exclusive ‘Day in the Life Of’ interview series.

[S360]: What’s your take on some of the biggest tech company PR fails in the news recently (i.e. Uber)? Is this, at least in part, a function of growing too big too fast without the necessary infrastructure in place?

[SS]: I wouldn’t call Uber a fail just yet! But yes, fast growth can kill. More than infrastructure and processes, failure is a result of founders’ / management’s mindsets and attitudes NOT changing. Do your kindergarten learning / functioning skills work in high school or college. Self-induced evolution is hard to do…but it is necessary for any successful entrepreneur.

[S360]: Take us a on quick 30 second high level journey through your career to this point, culminating in the launch of myStartupCFO.

[SS]: I have changed fields of work every ten years or so, but I’ve always included the previous experience to enrich the next. My first ten years were as a hands-on computer programing geek in Silicon Valley startups. The second ten years were analyzing tech companies on Wall Street (which I did not like much!) and working in finance roles in tech companies. The third ten years are a culmination of tech, finance, and previous 20 years of nonprofit work in the women and children’s literacy field in India. myStartUpCFO is a financial services startup providing services to other startups. All this while employing women who are working from home, which allows us to stay nimble as an organization, and also provide a stable, challenging career to women who want a healthier work-life balance.

Read more …

Image Source : http://bit.ly/2ny4Rgk

Are You Smarter Than A Fifth Grader?

After speaking with hundreds of CEOs, I realized that burn rate isn’t as Startup101 as I had thought. There are still a lot of things that founders understand incorrectly when it comes to being a #BurnRateZombie. But before we get into it…

Let’s take a pop quiz!

Once upon a time, there was a CEO running a very promising startup. The company was all set to join the ultra-exclusive Unicorn club. It was valued at $900M, and this is how their cash inflows and outflows looked:

(FYI, Singapore fifth-graders’ are expected to take one minute to answer that.)

Thinking $62M? Well, your math is as good as the fifth graders, but you should know better.

Jason realized after all this burn that he doesn’t have a business model. His company had become a #BurnRateZombie, so he sold all inventory, cut the staff, and finally offloaded the company for a special clearance price of $15M. Jason hems for a living now.

Burn Rate is very complicated. See if you understand this.

Burn rate = Money that comes in — Money that goes out

No, don’t mock. It’s tougher than it looks. In fact, I’ve had this talk with so many founders that I created this burn rate calculator to better illustrate my examples.

You can run your numbers at this link: BURN RATE CALCULATOR

Don’t know what numbers to fill in? You need to talk to us.


Jason wasn’t paying attention to the red flags. But here is what you should be doing:

  1. Sit regularly with your accountant and deep-dive into your numbers (I hope you have an accountant!). Beyond the bean counting (what’s coming in and what’s going out), you should have an overall sense of your financials. One thing about numbers — they don’t lie. Know your top five buckets of expenses and analyze them for patterns. Look out for unexplained numbers and unusual variations in expense lines. Grill your accountant on and make sure she/he knows the stuff.
  2. Ruthlessly track KPIs. Track your Key Performance Indicators and tweak your strategy based on what they are telling you. Do not forget that B2B and B2C businesses track different KPIs. For example, as a SaaS company, do you track your company’s magic number? A lot of disciplined operating KPI tracking goes into this number. But once you have the systems in place, the resulting insight for your business are priceless.
  3. Keep your eyes and ears open. Keep an eye out on the market indicators for funding. For example, if the market is down, raising funds might take longer than what you’d earlier accounted for. If you are not prepared for it, that could be fatal. Don’t die mid-keystroke. Die trying. But above all, avoid dying at all.

“If you can just avoid dying, you get rich. That sounds like a joke, but it’s actually a pretty good description of what happens in a typical startup.” — Paul Graham, Y Combinator

4. Know your burn, track your burn, control your burn. Question the expenses you’re committed to. Just because you have okayed something in the past, doesn’t mean you don’t track it’s ROI. The money you spend on networking events is a classic example of doubtful ROI. Constantly trim the fat.


Survival stories are boring. Who wants to hear about the company that didn’t die? Only our client founders, their investors, and us.

Avoid being a #BurnRateZombie by tracking your burn rate. Make your story boring again.

The best time to talk is now! Call us today.

 

Burn Rate Zombie

Are You A Burn Rate Zombie?

India’s Taxi Wars will make a great movie one day. The good guys, however, don’t always win.

Sometimes they die before the movie climaxes. Today, the leaders in India’s taxi wars are Uber and Ola. It wasn’t always so. There was another, a more scrappy competitor in the early days.

It’s 2015, Uber had been blocked out of China, and had their eyes on India, the next largest market. There were already many copycat businesses in India that were preparing for Uber’s arrival. The main two were Ola and TaxiForSure.

In anticipation of Uber going full-throttle, both Indian companies started to burn money on subsidized trips and city expansion. TaxiForSure was a well-run upstart. They had a disciplined management team, raised a round of $30M, and had mastered the art of operation and expansion into India’s chaotic market. In three months, they had already expanded to 47 cities. They were subsidizing each trip for approx $3 each and were clocking 8,000 trips a day.

Both the Indian companies needed to raise money fast. Word on the street has it that TaxiForSure considered themselves a better-run company, and was asking for a higher valuation, and so held out longer for the right fundraise. Ola, in the meantime, raised $200M from SoftBank at a valuation of $2.5B. Now they had cash to burn. TaxiForSure was down to four months’ burn but continued to burn money regardless. 

On Jan 12, 2015, Raghu, the founder of TaxiForSure, boarded the flight to San Francisco. He was set to meet 20 VCs on that trip. But as he was flying over the Arctic, his world turned upside down. An Uber driver had raped his passenger in India that night, making Uber Public Enemy #1 in a nation housing one sixth of the world’s population.

Every VC Raghu met had only one question: With the Uber incident, what’s the fate of the unregulated radio taxis in your country? The cloud of uncertainty rained on Raghu’s Sand Hill Road parade. It questioned the ethics and business policies of the heretofore unregulated $7B radio taxi business in India, and no investor wanted to touch this with the proverbial  ten-foot pole right now. With no cash and continuing to burn, he was more than dead. He’d become a burn rate zombie.

Fast forward barely two months Raghu sold all of TaxiForSure to Ola for  $200 M, which was the amount he was hoping to raise, at many times that valuation.

Knowing the importance of fundraising and a manageable burn rate is startup 101, and yet, why do so many founders fail?

‘It will never happen to me’

I have worked with hundreds of founders, and all of them assure me (and themselves!) that ‘it will never happen to me’. Yes, you understand your product, market, and product-market fit. But do you understand all the aspects of your cash burn? What can you control in the short run and what you can’t? Is employee salary a variable cost or a fixed cost?

90%+ of founders will shut down their company eventually. 100% of these closures will be because the company ran out of money.

Just one tip.

You are spending more than you think you are. And fundraising really isn’t going to happen as quickly as you’re planning it would.

What can you do?

In my experience of more than 25 years, I have observed a few bright red flags that warn of the winter to come.

Look out for them in my next post.

Busting Startup Myths: Tracking Financial Metrics is NOT Important

Busting Startup Myths: Tracking Financial Metrics is NOT Important

When I was out on lunch with the CEO of an early-stage SaaS startup, I asked him how his company was doing.

Quite well, I was told. The revenue is growing month on month, we have enough money in the bank, and the employees are happy. Life’s good.

Always a data-oriented guy, I asked him if I could take a look at his books. And when I did, I found out that while on the surface things were going well, a deeper look told an entirely different story.

On the aggregate, the company’s revenue was growing, but month on month, a good chunk of small customers kept canceling the service. The aggregate revenue from these customers was small, which is why their cancellation got lost under revenue increase from a few large customers. Were these cancellations driven by lack of features? Lack of good customer service? Or something else? It is generally a combination and you have to decide where to invest to fix the problem.

Mentally, it’s impossible to track too many pieces of information, and most companies at this stage make these decisions more on gut feeling and less on hard data.

Personally, I have always followed the pithy saying that my an ex-boss would repeat to me weekly:

In God we trust, rest everybody please bring data.

As on-demand CFO service providers, this is the discipline we bring to startups: diligently gathering data and deriving conclusions that will make or break the company at this young stage.

A case in point would be measuring the efficiency of a company’s investment in sales and marketing. An excellent example of this is the “magic number” metric defined by a veteran Silicon Valley investor Rory O’ Driscoll of Scale Venture Partners. A lot of disciplined operating KPI tracking goes into coming up with this number. But once you have the systems in place, the resulting insight for a SaaS company is priceless.

In Rory’s words:

“An investment is made in Q1 in sales and marketing (S&M). The revenue starts going up in the books, usually in the next quarter (Q2). The correct ratio to look at, is not the relationship between S&M expense to revenue, but the ratio of S&M expense in that quarter to the change in revenue for the following quarter.”

Let me simplify it. Take the change in subscription revenue between two quarters, annualize it (multiply by four), and divide the result by the S&M expense for the earlier of the two quarters.

(Quarterly Increase in MRR x 4) / (Sales and Marketing spend of previous quarter)

The idea is that if your magic number is > 1, the company is growing efficiently, and your S&M expense is in the right direction. You can consider increasing it. If it’s <0.5x, the company is still figuring out its model, and you need to take a step back and re-strategize. Anything in between could eventually be successful but in a relatively capital inefficient manner.

This is the magic number that SaaS enterprises often get wrong. And this is one of the many myths we at myStartUpCFO help our CEOs bust. We have done it for dozens of companies, and would be happy to help you. Feel free to reach out through a comment below or directly at sshroff@mystartupcfo.com

There is NOTHING more expensive than a cheap accountant!

There is NOTHING more expensive than a cheap accountant!

There is one thing that I tell every client and employee I work with.

Bad information can kill you.

Think I’m exaggerating? Ask the guys who blindly followed Apple Maps in Australia and landed in death traps – stranded in the middle of nowhere for up to 24 hours.

And when bad information comes from the person handling the finances in your startup, it can and will kill your company. CEOs are often complacent in the confidence that everything is okay because their CFO says so. They’re on a hiring spree, until they wake up one morning and learn that there’s no money to fund the next paycheck of their 400-something employees, and there’s no recourse but to declare bankruptcy. And fire them via email and quietly delete all their social media accounts. (Zirtual, I’m looking at you).

The accountant says your bank balance is $200,000, which is all good, it’s enough runway for a couple months. But he forgot to account for this big AmEx bill that has been building up, or forgot that the San Francisco payroll tax of 1.162% on 2015 payroll is due on Feb 29th.

Oops.

As a CEO, how do you make sure this situation does not arise? What are the red flags you need to look out for? It’s vital to make sure your accountant is capable and adroit, but while a QA might work with an engineer, how do you test your accountant?

One, make sure you always ask a few detailed questions when you review with your accountant. He tells you your burn rate is $100,000, you grill him for a high level breakup. What part of it is variable? What is fixed? Any change in spending pattern? While these questions will get you some relevant info, but more importantly, they increase your confidence in your accountant and his / her own diligence with numbers before they present the numbers to you.

Two, look out for unexplained numbers and unusual variations in expense lines. If in a 10 person company, your food amounts to $20,000…pause. Analyze.

Make sure your accountant knows the five big buckets that account for 80% or more of your burn.

If you have a budget, compare it with actuals, and analyze the deviations with your accountant. If he stammers and stutters or says “I will get back to you,”, you’ve been warned.

The conclusion is simple: trust but verify, and be careful with your hiring. A cheap accountant can prove very expensive!

If you have any doubts or questions, feel free to reach out to me via LinkedIn or email at sshroff@mystartupcfo.com. I’ll be happy to provide an audit of your books to warn you about any red flags. Our website is www.mystartupcfo.com if you’re interested in knowing more about what we do.

Looking forward to hearing your thoughts.