In the business world, the thrill of launching a start-up is incomparable. The journey from an idea on paper to a fully-fledged business is a rollercoaster of emotions, determination, and endless possibilities. This means the early days of a startup are marked by excitement and adrenaline, however they also come with a huge number of challenges.
As a founding partner with Spacecubed’s Plus Eight accelerator program since 2016, we’ve been intimately involved in the startup ecosystem in Perth. Managed by Partner Ben Clarkson, this partnership has offered financial mentoring for program participants, including assisting with forecasts, projections, cashflows and financial modelling.
Throughout the mentoring within the program, we have witnessed the highs and lows, and gained insights into the challenges, mistakes, recoveries, and failures faced by startups and their founders.
In a two-part series, Ben shares his observations regarding common areas where startups and founders frequently encounter challenges. Additionally, he provides practical tips for founders to navigate these challenges effectively.
1. Setting Up with an Incorrect Business Structure
Like any kind of venture, planning with a solid foundation is imperative. For startups, this foundation is rooted in selecting the most suitable business structure. This decision holds sway not only over the operational aspects but also over ownership and governance. Whether it’s a sole proprietorship, partnership, company, or trust, each structure bears its distinct legal, financial, and tax implications.
In cases of multiple owners, establishing clear shareholder agreements becomes paramount. These agreements outline ownership percentages, decision-making processes, profit distribution, and mechanisms for dispute resolution.
While our mentoring often involves established startups already operating within a structure, it’s common for these structures to be suboptimal. Founders and teams should collaboratively consider questions such as:
- What degree of control do I desire?
- How comfortable am I with personal liability?
- How will taxation impact my business?
- Have I accounted for succession or exit strategies?
- How much flexibility is needed for future modifications?
- What level of complexity is acceptable for setup and administration?
2. Unrealistic Assumptions within Financial Modelling
Creating a financial model is akin to charting a course. Startups require a detailed financial plan that outlines their path to growth—a document pivotal for informing potential investors.
This model hinges on grounded assumptions, growth rates, and projected costs. Realism reigns supreme here; it’s important to recognise that a product-based startup may not attain the same growth rates as a Software-as-a-Service (SaaS) startup with significantly lower scaling barriers.
We often encounter overly ambitious growth rates that don’t align with industry benchmarks, and while rules are meant to broken and optimism is definitely important, it’s prudent to err on the side of caution for your modelling.
The approach of under promising and overdelivering can lay the groundwork for well-informed decision-making, robust strategy formulation, and adaptability to market shifts when opportunities arise.
3. Poorly Anticipating or Navigating Cash Flow Challenges
Cash is king, and it is cash that ultimately turns ideas into reality. Effective cashflow management ensures that a business can meet its financial obligations and seize opportunities for growth. Cashflow modeling goes beyond revenue projections; it delves into the capital needed during different phases of growth.