A Founders’ Guide to Startup Finances and Survival
So you’ve decided to start a business. You’ve fleshed out your idea, nailed down your game plan, and you have a bit of cash to keep you going for the next year.
Month one goes by and everything’s peachy.
Month two creeps up and things are feeling a little tight.
Month three rolls around and YIKES–you’re already out of money.
Many new startups underestimate the costs and the time it takes to get up and running. If you’re an up-and-coming founder, buckle up for the ride of your life. Launching a startup is a rollercoaster of emotions, successes, and potential failures.
But these risks are part of the reason why you took the plunge in the first place. Entrepreneurship gives you the freedom to innovate new ideas and products, hire your own team, gain traction, and if all goes well, rake in the high returns to become self-sustaining.
The key to saving yourself from the financial drain of starting a new business lies in the numbers. But what do you do if you don’t have the cash, experience, or the know-how to keep your books straight while running your business smoothly?
Fortunately, there is a wellspring of resources out there for startup founders, and our resident experts at Harvest have put together this finance guide for entrepreneurs wanting to keep their early-stage companies as healthy as can be.
We’ve sifted through page after page of articles and templates, collecting the best practices and tales from companies who have made it to the promised land of self-sufficiency. More importantly, we’ve uncovered lessons from those who have seen the startup graveyard and can help forge your path to avoid costly mistakes.
When you’re through, you’ll have a solid idea of where your numbers are leading you, how you can leverage opportunities to grow and refine your business, and of course, find effective ways to keep money pumping.
Let’s get to it.
- The Basics
- First thing’s first – what is financial planning and analysis (FP&A) and how will it help you sleep better at night?
- How to get your accounting ducks in a row
- Why your startup budget and costs can’t wait
- What is a profit and loss statement (P&L)?
- How to calculate your break-even analysis
- What’s the big deal with balance sheets? OpenDigits walks you through how to prepare one for your startup.
- What a sources and uses of funds statement–AKA cash flow–tells you about your money
- A burn rate calculator to check your startup runway
- What you need to know about claiming startup costs from none other than TurboTax.
- How to value a startup company with no revenue
- Building Your Financial Model
- What is a financial model? Will Little and Troy Henikoff from Startup Rocket define it and debate why founders should build one from scratch.
- 10 types of financial models from mergers to sum of the parts models
- The differences in approach: top-down vs. bottom-up forecasting. Explained in three minutes by David Ehrenberg, CEO of Early Growth Financial Services.
- Common startup mistakes to steer clear of with financial projections
- How to effectively determine your market size
- What is your riskiest assumption? Case studies from Groupon, Dropbox, and Airbnb.
- Startup Equity and ROI
- What is a cap table used for?
- Fair doesn’t always mean equal. How to split equity fairly between your co-founders with insights from Bryant Galindo.
- Why vesting is your best friend as a founder. Founder Institute spells out how to compensate team members without money.
- Negotiating your term sheet
- Who gets ownership of what? MaRS Startup Toolkit breaks down preferred and common shares, and Forbes dishes out a list of pros and cons of each.
- When founders disagree, cue in the convertible note.
- An overview of ESOP (Employee Stock Option Plans) for founders
- How dilution works with ESOP
- Raising Capital
- The most seductive guide on raising capital for a startup
- Some startups can get by without venture capital. But here are 5 reasons why you should shoot your shot with VCs.
- How you should be thinking about your growth like an investor
- The power of simplicity in your investment story when gearing up to scale
- Sink or swim: why bootstrapping will make you a better entrepreneur
- Poor Money Moves that Flamed Out These Startups
- The biggest product flops from corporate giants, including Google Glass.
- Quibi’s crash landing barely six months after going live
- Australian neobank Xinja throws in the towel after a capital-raising drought
- Dubai’s Awok goes bust just after a year raising $30 million Series A, one of the largest investment rounds for an e-commerce startup in the region.
6. Smart Money Moves That Landed Success
- What companies like SAP, GoPro, Clorox, and Coca-Cola did right when bootstrapping their business.
- How Tough Mudder built a $100 million company out of mud with only $7,000 in the bank.
- How Wayfair earned a Series A worth $165 million by not doing any brand advertising.
7. Mapping Out Your Exit Strategy
- How to successfully exit from your first startup company. Advice from Manny Padda, an angel investor with 23 exits under his belt.
- The pros and cons of going public vs. being acquired (IPOs vs. M&As)
- How long it takes to make a clean break. Crunchbase analyzes 127 publicly traded tech companies.
Building a financially sustainable business isn't easy work, especially for early-stage startups that find themselves burning through cash. A poor business model and lack of cash flow are your early warning signals that you may be depleting your resources faster than you can keep up with.
But when you're disciplined and plan ahead, you have the advantage to minimize your risks and max out your rewards. The best way to become a self-sustaining company is to develop a well-formulated financial roadmap.
By focusing on your mission, laying down a strong financial model, and zeroing in on available opportunities, you can launch and scale your business without worrying about steady revenue. Now that you've got the ABCs, or should we say 123's of startup finance down, it's time to put it to good use.