by David Drake
For startup entrepreneurs, knowing exactly how much capital they need to raise can be a challenge. As a result, most entrepreneurs either ask for very high or very low amounts. This undermines their fundraising efforts.
Breaking down numbers accurately can help address this problem. Accurate numbers assure investors, lenders and business owners that a good deal of research and planning went into creating a realistic view of a startup’s financial needs.
It is easy for startup entrepreneurs to miss out on important details when creating a financial plan. Here are five common mistakes in startup financing you need to pay attention to:
1. Securing Less Capital than you Need
According to a Hiscox survey, about 18 percent of startup owners do not secure sufficient capital because they underestimate their starting costs. Entrepreneurs tend to be overly optimistic about generating sales over a short period of time.
Most startup owners think their startup is financially stable as soon as they make their first sale . They forget that it might take clients up to 60 days, or even longer, to pay. Delays in receiving payment for goods sold or services offered must be factored in determining the capital needed to get a startup up and running.
The secret lies in developing a realistic plan. Estimating lower revenue, high costs and longer payment duration helps ensure a startup secures sufficient capital to keep running until sales start streaming in.
2. Giving into the Demands of the Investor or Lender
Most startup entrepreneurs get excited when investors or lenders find their business ideas worth investing in. However, investor funding comes with demands and a high price.
Though the need for financing may be necessary, or even urgent for a business, it is important that entrepreneurs keep off from unrealistic demands of investors or lenders. If not carefully evaluated, these demands can burden the startup.
Unnecessary costs like debt repayment and high interest can cause the entrepreneur to relinquish ownership control of your startup. Evaluate different options and go for financing that costs your startup the least in terms of debt and interest, and delivers benefits that you consider critical.
3. Prioritizing Expenses that Don’t Facilitate Growth
Investors and lenders prefer to invest on things that enhance growth of startups. Most startups fail to draw up an adequate finance plan. This makes it difficult for them to sufficiently explain how invested funds will facilitate the startup’s growth.
Prior to seeking cash injection, develop a comprehensive finance plan. With this plan, you will know exactly how much your startup needs and for what purpose. A good plan should demonstrate sound reasoning – show how funds will be spent and the accruing benefits to the startup. Requests for funds will be given more attention if they are directed towards the purchase or development of products that will generate revenue in the long run, compared to the purchase of non-essential assets.
4. Under-rating Running Costs
Startups need funds to meet the most basic running costs such as employee salaries, supplier payments and other recurrent costs to stay afloat. Most startup owners underestimate their monthly expenses. They remember major expenses and forget smaller costs such as insurance and taxes. These hidden costs can significantly increase running costs for a startup if not taken care of. To avoid making this mistake, reach out to people running similar businesses to gain insights on how their expenses look like now, compared to what they were at the beginning when they were just starting off.
5. Giving Service Providers too Much Stock
Most startups offer stock in exchange of discounted or free services to service providers. While this helps a startup access necessary services to grow, it can be detrimental for the business. Startup entrepreneurs should determine early on how much stock they are prepared to give out. A vesting schedule to tie stock grants to measurable performance or deliverables should be prepared. This ensures recipients of stock grants deliver services in full as agreed.