Startups Money

Lean Startups: What's the #1 reason why tech startups fail?

19 Aug, 2013

Am not sure it's something many people have mentioned, but the absolute #1 reason tech startups – or for that matter – any startups fail – is…

1) they run out of money.

I can't emphasise enough how important it is to have enough cash to pay your people till your customers start paying you.

Here's what I tell the startups I talk with.

Do one single spreadsheet. Mark the months out in columns – take it out some 18 to 36 months. In the rows, start by listing every single estimated expense – in the month you make that payment. Every single one – salary, travel, tea, coffee, future hires, raises, every single thing you can think of. Sum these up in every column "these are your total estimated costs for that month.

Once you come to the end of this, then start listing the estimated revenues from all the work you're doing – in the month the revenue hits the bank. Guess whatever you can. For a media business, estimate pageviews, ad fill rate, CPMs, 90-day credit cycles, whatever. For an e-com business, estimate visits, conversions, leakage, credit card payment collection, everything you can. For a B2b business, estimate the number of calls it'll take to get an appointment, the number of appointments to turn it to a hot lead, the amount of time to turn that into a sale, and the time it takes to turn that sale into a first cheque and so on. And yes, be conservative. Sum this up in every month's column. It'll likely start with zero – but these are your total estimated revenues every month.

Now, do the est. revenues minus est. costs row. It'll likely start with a negative number. And as you go towards the right, the negative will likely reduce till a point when the number becomes positive. Call this the "funding gap"

Do another row which does a cumulative of every month's funding gap. This number will keep rising – at one point it'll hit a peak, and then descend as you go right on your spreadsheet.

This "peak funding need" is the amount of money, at the very least, that you need to have. Add 3 – 6 months more of estimated costs just to be safe. Go get that amount of money from somewhere. Or figure out you can get that money from somewhere. Then start. You'll drastically reduce your chances of failing.

Don't start without this.

My $0.02.

(Reproduced with permission from Mahesh Murthy, managing partner at Seedfund; founder & CEO, Pinstorm)