As I’m sure you are aware, surviving that first couple of years as a new business is a huge challenge, waiting for cash flow to turn positive. In my experience as a business advisor and occasional investor, many of you won’t make it that far, succumbing to the high costs of getting those first customers, funding an initial inventory, and building an operational support process.
Of course, it helps to pick a business model that minimizes these costs, such as e-commerce to minimize initial staff and facilities, or professional services, where you are the initial product. After you have sold your first company for several hundred million, you can then afford to challenge Elon Musk on the next line of electric vehicles, or Apple with a new and better smartphone.
For the rest of us, I’ve accumulated the following additional practical strategies for surviving the scale-up challenges, and making your business profitable and sustainable:
Enlist an experienced advisor to project real costs. Don’t let your passion and “can-do” attitude convince you that you can overcome all financial realities. I’m a big fan of first creating a real business plan, with five-year financial projections, to convince yourself and investors that you have done your homework. The advisor will give you real credibility.
Assess your resource potential before you start. Surprisingly, I still find many aspiring entrepreneurs who assume that if their idea is good enough, funding will appear. There is a reason that ninety percent of startups are still self-funded, and most of the rest have major contributions from friends and family. Build your plan around resources you know.
Start networking for funding before the crisis. Even if you intend to bootstrap the business, or have an anticipated funding source, it pays to start early in lining up an alternative. When the cash crunch hits, or other alternatives change, it’s too late to start looking, and you won’t have any leverage or credibility to negotiate the terms you want.
Join a startup accelerator or structured peer group. The real value of these groups is the relationships you can build with key people who can help you later, as well as the early learning from the incubator organization. These can be a key source of funding connections, vendor contacts, and potential partners during your rollout and scaling.
Negotiate bartering deals versus cash contracts. Don’t underestimate the advantages of providing your products and services in exchange for access to facilities and equipment you need to grow. Especially today, when more companies are willing to work through outsourcing, freelancing, and contracting. Everyone wins with this approach.
Nurture current income sources as long as possible. Contrary to the advice of Mark Cuban, don’t quit your current job until the new business is cash-flow positive. Startups always take longer to get started than anticipated, so jumping in with both feet too early will dramatically increase your risk of running out of money with no buffer available.
Actively seek out government and local incentives. Especially in these times of pandemics and economic initiatives, SCORE and other government agencies are likely to help you if you plan ahead. These programs don’t usually ask for equity, and they are particularly targeted to the early stages of your business to facilitate growth and survival.
Negotiate a line-of-credit with a financial institution. Even if you don’t intend to use it, a line of credit is a great backup for unanticipated scaling costs, such as inventory. It’s another backup that can be arranged much more readily before a crisis, is more often available than a loan, and doesn’t usually cost money until and unless it is really used.
Consider partnerships or joint ventures with competitors. This approach, often called “coopetition,” works best when you find someone who has complementary products, rather than direct competitors. In these cases, you both win by expanding the market. Use this strategy to fill gaps in your product line without great new cash outflow.
Use “white label” or custom contract for extra income. White labeling is custom branding your product for a particular customer, to keep committed resources busy. You see these labels at grocery stores all the time. Similarly, a custom contract for a big customer can get you over a growth gap, without diluting your brand in the market.
In the minds of most business consultants, the challenge of surviving as a business until you make a profit is so great that this stage is often labelled the “valley of death.” It’s the time when your invention or innovation gets transformed into a viable business, or you have nothing. I’m counting on your diligence, as well as your passion, to make it happen for you.
Marty Zwilling
