The hype around the startup scene in Australia is only getting stronger and stronger as innovative and energetic entrepreneurs emerge with commercial opportunities and ideas. Conferences and events are popping up all over Australia as an opportunity for these startups to network, share ideas and pitch to potential investors. Although this is an exciting period for these keen startups, the financial realities that come with this approach to business can quickly put up roadblocks that can be difficult to navigate without the knowhow. There are a growing number of startups reaching a standstill, not knowing how to grow their business further, not knowing how to raise capital, and certainly not knowing how to use that capital once secured. In many ways it’s a double edged sword for startups – with little money coming in it’s difficult to justify a spend on a professional advisor, however, without a professional advisor their dreams for business success could very quickly be dashed.
Understanding the various stages that take you from an entrepreneur with an idea, to closing on startup capital, and then to the next phase of landing on your feet and growing that business is what can keep startups from failing before they even begin. There is a desire amongst investors to see that a startup doesn’t only know how to grow and develop a product, but that they also have a plan for scaling up and being a true competitor on the national or even global stage. Going in without a plan is quite simply a recipe for disaster.
So what does this mean for a startup?
How can they begin to smarten up on these issues to ensure they make it through the next stage of growth?
Find out how to address these issues with some pointers from Azure Group’s Associate Director of Corporate Finance, Transactional Services and Virtual CFO, Anthony Harris.
Management and Working Owners
Startups must fundamentally have strong, formidable and capable founders with a demonstrable history of successfully building businesses, either as an owner or as an employee executing in a key role in building a business.
The history doesn't always have to be one of commercial success, but it certainly helps. Recently on a startup capital placement mandate, one of the seed capital investors offered words to the effect when speaking of backing a key person into what became a successful business and eventual sale of that business:
"Why did I back someone who blew up an earlier business?
Because he showed he could build a great business to blow up!"
This investor was not deterred by what most would consider a ‘failure’, rather, he saw that this individual was capable of building another successful business and he wasn’t going to reach a judgment with reference to only a founders successes, but was also willing to balance a failure with those successes . There are dozens of sayings on social media to reinforce the point that failures are sometimes the best path to success. Founders that have experienced the good and bad in the business life cycle journey can often have the perfect balance in their commercial approach.
Financial Management
A common phrase I hear from my clients is that if there is anything they have learnt in building a business it is that having a sound and capable financial advisor is vital. The key to any, and I mean any successful startup is to find the way to secure the services of an experienced, capable and proven money manager to not only deal with the backend of the financial management element, but a money manager that is more valuable at defining and attacking the strategic issues facing the startup as handling the debits and credits.
Revenues
Don’t start anything, don’t waste a minute, don't leave employment, unless there is a very clear and compelling path to market for a product that is in demand or could be in demand, and there are capable sales/business developers available to the business to make it happen. My own view is generating a dollar in revenue is one of the most challenging things to achieve in business. Some startup entrepreneurs simply don't know how to commercialise a good idea into the generation of revenues and hence on the road to hopefully achieve financial success.
Cashflow and Capital
We all know or have heard of statistics that makes any effort to launch a startup a daunting prospect. It’s not news that many will fail in the infancy of the business life cycle. Linked with sound financial management, a business must have capital, and capital of an amount and structure to align with the various stages of the business life cycle, and cash is king. Cash must be nurtured and managed and protected
“As an advisor to SMEs for many years, I have spent the greater bulk of my time in managing nothing but very tight and challenging cashflow. It detracts from a necessary focus on the very strategic issues that will help drive the business to the next level of success. Don’t be under-capitalised for too long. It’s a recipe for commercial failure.”
Costs
I quote a philosophy espoused by a hugely successful public company that has featured off and on in my career.
"Thicker the carpet thinner the profit".
If you have come from a life of comfortable employment don't bring it with you to the startup, because it can be a life of extreme financial risk, and a crushing burden on self and families. Keep the fancy offices, leather chairs, lunches at Otto's and wall art to when the capital has been repaid and the business has been re-risked as much as you can ever de-risk a commercial enterprise. In fact always keep it lean and generate cash reserves for the next adventure. The next startup.
Structuring
Any business that sets out to be genuinely relevant commercially will inevitably grow with third party capital, and growth can be constrained by a poorly constructed operating structure, as with any other poorly executed element of the startup business plan.
Spend time properly dealing at the beginning of the startup phase with the best in practice legal, tax and operating structures and frameworks, and there is less chance of it biting back later.
I have arranged cheques to the ATO for many millions of dollars, when better structuring could have left the owners and investors with more.
Finally, (but not exhaustively, that would mean writing a book) - recruiting, retaining and building a passionate high performance TEAM is key.
I have worked for some truly exceptional human beings that happen to run businesses, and some others not so exceptional.
There is one thing to be assertive and direct and passionate about driving toward solid and successful commercial outcomes, and another to be a monster to those that get behind your vision and work for you, as startup Founder / Entrepreneur. There is a book Working with Monsters and it got published, sadly, for a reason.
Building your team and the way you build a team would seem sensible and obvious enough, but I have been witness to many businesses, both from the inside and the outside that ultimately do not achieve what they are capable of simply because the owner(s) are incapable of recruiting, retaining and building high performance teams.
Do the right thing and understand that your fellow team members, in engaging in your startup business, are investing the most important thing they have - their valuable time. Nurture your people and reward them. Go the extra mile and become an employer of choice and watch the people that get behind you grow and prosper, and watch the people that want to get in. Don’t be that Founder/Entrepreneur with all the financial success and money in the bank, but you have become “that” guy/gal to work for, or not work for.
“Life is short, you may be the one wearing the king’s crown but there are many kings in the ground that are just bones, with the crown still on their head. Sure, be solid in the execution but don’t decimate people along the way to get there.”
The Azure Team of CFOs ad Corporate Finance Advisory Specialists can guide entrepreneurs through all stages of the business life cycle, from startup to exit. Call us for a cost free, obligations free, confidential discussion and see how our experience will directly impact the launch and success of your business.
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