Avoid these common financial mistakes so your startup doesn’t die on the vine

The startup world can be a rollercoaster. While investment continues to pour in — with both founders and investors looking for the next unicorn — the reality is that 90% of startups fail, with over half of those going under in the first three years.

I’ve founded two companies that I grew and sold (Mezi and Dhingana). I encountered many of the issues that new founders face, learned on the job, and thankfully persevered. Using the knowledge that I acquired in my previous companies, I’ve founded a third — Zeni — to try and help founders make more informed, sustainable financial decisions.

Whether you’re just wrapping your seed round, or on to Series B, avoiding these common issues is the best way to ensure that you’re set on solid ground and free to focus on your vision.

Why most startups fail

Startups go under for a variety of reasons. Some fail to achieve product-market fit in a scalable way. Many others simply run out of money. While the above two reasons are often cited as the two primary reasons for startup failure, they’re also related. If you don’t solve a market problem and don’t generate customers, you’re eventually going to run out of money.

Unfortunately, many of the startups that fail shouldn’t. They’re led by bright entrepreneurs with a great idea. But for many founders, a transformative idea and initial outside investment doesn’t translate into understanding the underlying financial complexities of running a business.

When you break down the various complexities founders face in understanding business finances, there are three primary hurdles they face:

1. Fragmentation of financial systems.
2. Time-consuming manual tasks.
3. Lack of real-time financial insights.

All of the above issues put increased workload and strain on founders, which can lead to burnout. Owners, on average, spend around 40% of their working hours on tasks like hiring, HR and payroll. While hiring is integral to a founders’ day-to-day role, other administrative tasks related to finance, HR and payroll distract founders from focusing on their overall vision and goals.

The good news is that by being aware of the above issues, you can solve them and eliminate the consequences of burnout, distraction and, ultimately, failure. Let’s talk about how.

Consolidate fragmentation

The financial decision-making and tasks of most startups start and stop with the founder. This means that bookkeeping, bill paying, invoicing, financial projections, employee payments and taxes all run into a bottleneck. Even worse, each of these functions requires another employee, vendor or third-party expert — finance firms, admins, CFOs, CPA firms — each using its own software and applications to accomplish their goals.

Each of these parties is reporting back up to the founder, who is then in charge of making sense of it all and disseminating the information to the entities that need it. This means that not only is everything slower, but often things fall through the cracks, as communication can become a serious issue.

Worse still, this creates cash flow problems, as bills go unpaid, invoices go unsent, and important financial documents are delayed. I’ve seen revenue go unreported and invoices unsent and uncollectable due to the fragmentation-bottleneck system most founders experience.

Consolidating these processes and entities will reduce errors, speed reporting up and free the founder to concentrate on the larger vision of the company.
There are a couple of ways to go about this. You can hire personnel in-house or an outside vendor to take care of all of these tasks, centralizing the process and delegating authority below the founder level. The reason that many founders don’t do this is it’s often cost prohibitive.

Importantly, doing so also doesn’t solve the issues of manual data inputs and real-time reporting, which play a large part in financial mismanagement during periods of rapid growth.

Automate and delegate as much as you can

Managing the finances of a startup requires a considerable amount of time and attention to keep up-to-date. Until recently — and still today for many companies — this was accomplished by founders themselves or a small army of administrative assistants and outsourced bookkeepers, who collected data and then entered it into local or cloud-based apps.

Founders also take on a litany of manual finance-related tasks, like signing and sending invoices, authorizing employee expenditures, monitoring changes to monthly financial statements, gathering data for potential investors and more. It’s the last thing a founder wants to do when they’re focused on building their business, but it’s essential to avoid financial issues down the line.
These processes are incredibly slow and labor intensive, as the data has to be gathered, input and then later analyzed. Plus, it relies on the idea that humans won’t make input errors, which is unfortunately not true. While some processes still require manual data entry and human expertise, many can be automated.

Cloud-based accounting software like Quickbooks Online include some automation capabilities, and there are more sophisticated artificial-intelligence-enabled platforms and services that offer full-service bookkeeping, accounting, invoicing, bill payments and financial projections. They don’t completely eliminate the need for human expertise and oversight, but they greatly reduce the amount of manual data entry while improving accuracy. The key is to find an automated solution to data entry that reduces the amount of time you spend on the tasks without further fragmenting your accounting functions.

Prioritize real-time data

The first two problems result in the last one, which can have dire consequences. The issues caused by fragmentation and time-consuming, manual tasks create lag, where month-end reporting, financial projections and general awareness of overall spend and income of a startup are woefully behind.

Understanding what your burn rate was two months ago and what the money was spent on has some utility. But it doesn’t give you any accurate picture of what you’re currently spending and how much money you have left. Series A startups spend, on average, $400,000 per month. Unfortunately, founders rarely have a clear picture of how much they’re spending, or where that money is going.

At my first company, I saw our spend on marketing grow by 30% one month. But I didn’t find out until over a month later when my month-end financial statements were delivered. It then took emails, meetings and research between myself and our CPA to figure out why. If I’d had access to real-time data, I’d have known my marketing spend had increased, easily identified what was causing it and adjusted my budget accordingly.

Growth and spend happen at an incredible pace in most startups. If you don’t have real-time insight into this aspect of your business, there’s no way to make informed decisions for your immediate or long-term future. Flying — and spending — blind is what leads to most startups running out of money, regardless of how much capital they’ve raised.

Thankfully, this issue also has a solution, and one that addresses fragmentation and manual inputs. Advances in artificial intelligence provide startup founders with real-time reporting that also gives insight into what’s changing financially month to month, week to week or day to day. This not only gives an accurate picture of the now, but can help with the communication issues caused by fragmentation, and further automate processes and eliminate errors.

And when it’s time to raise more capital, access to turnkey, up-to-date financial metrics and reports give prospective investors an accurate, complete picture of your finances. This level of access and accountability is invaluable to investors, which will make them much more comfortable with investing in your company.

Free yourself to be a founder

The issues outlined above affect most founders; I ran into them trying to grow my first two startups, as an angel investor evaluating investment opportunities and in my role today at Zeni. Entrepreneurs have so much on their plate that growth dictates much of the decision-making and, without proper delegation or insight into operating expenses or burn rate, can lead to critical financial missteps and burnout.

Many founders are blessed with brilliance. But that doesn’t mean that they inherently understand the complex finances and metrics needed to run a company effectively. And most don’t want (and shouldn’t be) using 40% of their time to take care of these tasks.

If you have a product or service that solves a market problem, then clarifying and gaining control over your financial situation is the most important aspect to making sure you end up as one of the 10% success stories, and not one of the 90% failures. Doing that doesn’t have to be cost prohibitive. But it’s absolutely essential that you do it as soon as possible to give yourself the greatest possible chance of success.

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