One of the main reasons why start-ups shut down is that they run out of cash because of a high burn rate. While start-ups and investors are mostly concerned about net burn rate, they should be equally concerned about gross burn rate as revenues can quickly dip due to a range of micro and macro reasons, not excluding an economic downturn.
Generally, the perception is that start-ups across the board could do with more frugality. A start-up’s journey can be altered if these tips are timely followed, so, at the cost of being repetitive they will hopefully serve as reminders to ambitious entrepreneurs, as the consequences of a high burn rate doesn’t stop short of their start-up’s demise.
Below are 5 ways to make sure your start-up doesn’t burn out:
Always Focus on Profit
The best way to stretch the funds from venture capitalists is to focus on making a profit. Focusing on just increasing your business revenue does not mean raking in millions but rather controlling costs and preventing overspending. Each start-up needs to realise its own reality and spend accordingly, also be flexible as burn rates will vary depending on the stage the start-up is in its lifecycle—product, user, or revenue.
Never Follow the Herd
‘Unicorn’ is a term coined by the investment community in the US, making them a rarity. The hunt by investors for potential ‘Unicorns’ is becoming more and more difficult. Start-ups put themselves on trial to attain Unicorn status so that they can get under the investors’ radar.
My experience has taught me that start-ups should be operating on the survival instinct— focusing on building products, dealing with competition, being lean and nimble on the assumption that future funding may not be possible.
My advice as an entrepreneur would be, not to go about blindly doing what other funded start-ups have done because many have failed.
Hiring Remote Teams
In order to get the best talent on board Multinational companies have policies allowing employees to work remotely, from home, on flexible schedules. There is no reason why start-ups shouldn’t follow suit.
Start-ups enlarge their talent pool when they include professionals who have the skills, irrespective of the location. Hiring them would not only be more affordable, but also may reduce the start-up’s overhead expense in cities like Gurgaon, Bangalore or Mumbai, where both the cost of living and doing business is exorbitant.
Controlling the marketing budget
It’s a chicken-in-egg situation. Start-ups, in their single-minded obsession to increase the number of customers, believe that just spending on marketing will be enough. Spending a lot on marketing can make burn rates hit the roof. Start-ups should focus on their content strategy. Great content positions you as an expert, it is free and its impact is long term if you stick with it consistently and keep the bar high.
Equity, equity, equity
Not everyone is daring enough to be an entrepreneur and start their own company, but more and more professionals are willing to bite the start-up bullet nowadays. Many of these professionals are from premier educational institutes and could potentially be working with Fortune 500 companies but instead have invested in start-ups, which while far more volatile, also move faster, with more intensity, and gives them freedom to innovate, and most importantly, a stake. Employees in start-ups are one of its greatest assets and giving them a stake would help in retention of these employees, especially, in situations where paying steep salaries is just not possible.
Consistently keeping start-up burn rates low is difficult, because as in life, unaccounted incidents happen without warning, and entrepreneurs can’t afford to let the ball drop too often, too soon. Being an entrepreneur keeps one on their toes—watching cash flows, devoting time to raise funds, looking for growth in business, all add to the reasons entrepreneurs have sleepless nights.
By Manoj Chandra, Founder and CEO of Insperme Consulting