There is no such a thing as growth at all costs. Yesterday’s fairy tale of the Venture Capitalists, who willingly poured money into startups for more growth, is no longer a reality. Simply because VCs has come to a conclusion, though agonizing, that they drove the startup entrepreneurs unconsciously to focus solely on top-line growth where revenues and gross sales is the metric. The receivers of funding, consequently, start burning the raising capital through quickly to fuel growth. The result is a disgraceful percentage of failures on the part of the startups. Today’s reality is the necessity of charting the course of efficiency as opposed to growth. Startup entrepreneurs must be less dependent on the top-line gross revenues and more dependent on bottom-line profitability. To thrive in this brave new world is to rely less on expensive capital and focus instead on profitable growth and efficient use of cash on hand.
Poor cash-flow management stands as the most problematic issue any startup faces. Many small business owners has their eye on the horizon where the customer’s life value counts and in the process forgets the day-to-day necessities of paying bills, being on budget and improving sales. Building a brand can’t be achieved overnight. It’s a process that can be initiated by delivering massive value to customers and capturing value in the form of revenues and repeated business.
Having the bottom-line of net profits at the back of every entrepreneur’s mind helps him manage cash flow properly. He must be aware of the inflow and outflow of cash through documenting. Bearing in mind, also, that profits don’t necessarily turn into cash. Therefore, he must be stingy when it comes to every outlay of cash while being pushy to get his money back the soonest from customers. The real growth should be maintained through measuring the trends of how much the company is bringing in as opposed to how much it spends. The sole focus should be on efficiency and profitability.
The overnight collapse of the startup Zirtual is worth considering. It is a virtual assistant startup that matches up people with virtual assistants. Though the company’s business model was sound, it chooses the easiest road of funding its business with the help of VCs. To take venture capital is to conform to the expectations of the VCs – focusing on growth at any cost.
Being enchanted with the lure of top-line growth, Zirtual incurred itself unbearable expenses. Besides the 400 employees it has, Zirtual gives its contractors the same privileges its employees have. It gives contractors the same benefits that added more to its burn rate. Another fatal mistake is outsourcing CFO functions to a consulting group that had missed several pay periods so much so that their burn projections turn out to be inaccurate. The cash-flow surprise shortage comes from the delay of the planned income later than the planned expenses. Being in this ditch, you are on your own. That’s what VCs regrettably declared to Zirtual.
By focusing on the fundamentals of business, startups can make it through these hard times. At the very core of these fundamentals is to let go of the hollow growth and focus instead on the bottom-line profits. Failing to do that will inflate your business the same way many top-line obsession startups experienced.