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.
For many founders, a transformative idea and initial outside investment doesn’t translate into understanding the underlying financial complexities of running a business.
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:
- Fragmentation of financial systems.
- Time-consuming manual tasks.
- 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.
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.