We see a lot of stories about new businesses every day! Some about wins, some about losses, and some about direct shutdowns.
But there are some interesting facts, I’ve learned about startups in India:
- Out of 10, every 9 startups fail.
- Only 1% of these successful startups become household names, like Zomato, Paytm etc.
- And only 40% of these startups become profitable, eventually!
But why do 90% of these robust startups fail and have a negative cash flow even after having millions of dollars? Moreover, why do startups not become profitable, even after several years?
Well, let’s find out!
In general, around 16% of the startups fail due to finance issues.
But one of the major reasons most startups fail is because of Negative Cash Flow! More than 82% of the startups face cash flow issues.
- Poor Cash Flow Management Techniques
Business, as a concept, is bound to make/money through its operations. But startups want to grow fast and burn cash to gain a massive customer base much faster than a normal business.
But most startups during the initial/growth stage burn cash without even earning a single rupee. This strategy puts them in trouble, as long as the funding survives, the business runs. Let me explain better with an example of a coworking space startup called Friyey:
Established in 2019 by Yogesh Thore, Friyey had an interesting approach. They transformed places like restaurants, pubs, and clubs into coworking spaces during quiet morning hours. Unfortunately, the startup couldn’t keep going due to poor cash flow management techniques.
Friyey couldn’t attract enough customers, and their expenses exceeded their income. Eventually, they had to shut down operations in July 2023.
- Lack of Adequate Funding
Every business, no matter its size or type, relies on money to survive. It’s crucial for a business to have enough money and to use it wisely. If a business doesn’t have sufficient funds or doesn’t spend them well, it can run into serious problems and might fail.
Frankly.me was a Q&A social site mainly for users in India. On this platform, people could ask big celebrities questions directly. Celebrities were more likely to see and answer questions that got the most upvotes from users. They could respond to these questions by uploading short videos, called “selfies” or “vlogs,” that were up to 90 seconds long.
Besides interacting with celebrities, anyone could join the platform and connect with others by sharing their own 90-second videos.
Unfortunately, Frankly.me had to shut down because it couldn’t get enough funding to keep going, even though it had been around for less than two years.
- Lack of Working Capital Management
New businesses have it tough to get favourable payment terms from customers and suppliers. However, it’s essential to stay on top of what you’re owed and what you owe.
As your business grows, you can negotiate better credit terms with suppliers {we have some tips for you!}. Timely invoicing and consistent follow-up on payments are key to avoiding bad debts and ensuring a healthy cash flow. This will ultimately help you with working capital management and reduce the amount of working capital your business needs.
- Most Startups are in a Valuation Frenzy
These days, many startups that get funding are too obsessed with increasing their revenue and grabbing a bigger share of the market. They forget that the most important thing for any business is to turn their negative cash flow around to make a profit.
While it’s possible to keep going for a while with funding and making losses, eventually you need to figure out how to turn negative cash flow into positive. Investors won’t keep putting money into a business that’s always losing money and doesn’t have a clear plan for cash flow management techniques.
Let’s take the example of InoVVorX. The startup began early on, as they struggled with fundamental flaws in their business approach. While they managed to attract attention to their two products, they lacked a solid plan for making money from them. Additionally, they neglected their service-based business, which led to financial strain over time.
With a negative cash flow, they found themselves unable to pay salaries and had to let go of staff. Their attempts to keep the business afloat by earning service revenue and seeking investment both fell short. This marked the start of a downward spiral, with the need for more revenue conflicting with their lack of available funds.
Multiple factors contributed to InoVVorX’s eventual failure. One major issue was their focus on gaining a bigger valuation. They tried to juggle a service business along with two separate product ventures, spreading themselves thin and achieving mediocrity across the board.
Their tendency to chase every opportunity without proper evaluation also hurt them. Instead of focusing on refining one product, they kept building new ones, often just because they could. These projects consumed time and resources without delivering any tangible returns.
Ultimately, they failed to nurture any of their ventures properly, like planting seeds in different fields but neglecting to water any of them. Had they focused their efforts on one area instead of spreading themselves too thin, their chances of success would have been much higher.
- Lack of Formal Processes
Startups in a true sense, are generally a bit haywire. Every day the whole team and founder try to figure out solutions to their problems, whether it may be sales, finance or even operations.
However, most startups lack SOPs (standard operating procedures) in executing operations. The team is so focused on solving the problem in the moment that it reduces their future vision of establishing a process, eventually making it efficient. Without SOPs, the chances of errors are high, leading to menial results.
We know every business faces its own unique risks and rewards. Yet, many entrepreneurs still rely on their instincts when making decisions. Even at the start, having a strategic approach and set processes can help you with working capital management, avoid negative cash flows and enhance your business.
Want to implement effective mechanisms and unlock the potential of your investment? Looking to free up blocked cash and create 10x value?
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