While everyone is talking about the successful startups, there is hardly any data available about the failed ones.

CBInsights recently published their updated startup failure post-mortem list with 34 new startup failure post-mortems from 2015. The reasons for the demise of these 34 startups are incredibly varied ranging from patent trolls (Ordr.in) to running out of money (Zirtual) to not gaining enough traction (Nebula, Circa) to suffering a Slack attack (Kato).

 

Zirtual is of a particular interest, as the company showed no signs of going through financial difficulties until it suspended operations and laid off its 400 employees overnight via e mail. It even managed to raise capital just three weeks before the crisis and had a run rate suggesting nearly USD 1m of monthly revenue. So what happened? The simple explanation is ‘’burn’’.

It is no news that the burn rate of a company is to be closely monitored. However, often there are other metrics considered more important. The growth is usually associated with growth in headcount which results in additional spending on hardware, office space, etc. The assumption that more heads will generate more revenue is generally true. The tricky moment is the time lag between adding more people and the actual revenue growth.  It takes three months on average for a new joiner to be up and running, and if there is no sufficient cash to cover the paychecks, the company could be soon walking in Zirtual's shoes.

 

The reasons for high burn rate vary from company to company, but there are a few main watch out areas:

1.Hardware costs

In many cases it will be possible to start in the cloud and save costs related to expensive hardware and its storage. Google, Amazon, etc. provide a really good service. There is another advantage – you can easily suspend operations if something goes wrong.

 

2.Patents, licenses, etc.

If you need them to go live, make sure you have enough cash both to obtain them and develop the product. Some entrepreneurs believe that once they have the product, the investors will be keen to invest and cover the costs associated with the patents, licenses, etc. Unfortunately, this is not always the case and at the end you may find yourself having a promising product which you can’t launch.

 

3.Office Space

Consider co- working office space and working remotely until you generate sufficient revenue to support a fancy office. If you mix remote and in-house workforce, you could afford a smaller office but in a top area, which matters from a reputation standpoint of view.

 

4.Development and Customer Support Costs

It is good to analyze the product prior to hiring an in-house development team. If the product consists of a core functionality that is to be developed as a one off exercise and supported later, then it is good to outsource the product development and support to a trusted provider. This is valid for various e commerce platforms, blogs, marketplaces, etc. There are a few advantages associated with outsourcing:

  • It is hard for a startup to attract qualified developers, QAs, project managers, etc., as it can't provide the pay rates and other benefits that a mature company can easily afford. On the other hand, an IT outsourcing company usually has teams that have worked together for years, internal know-how and robust project management. The same is valid for customer support teams;
  • Cost. If you hire an in-house team, it is hard to utilize their time due to the development cycle specifics. There will always be team members waiting for someone else to complete his work so they can start doing their job. If you outsource, you will pay per hour for actually completed tasks;
  • No monthly paychecks, payroll costs, HR related costs, etc. It is easy to scale or downsize subject to your needs.

Consider outsourcing development only if your product does not require constant enhancements and new functionalities. If the product is development heavy, you may still outsource the development of the MVP / Minimum Viable Product/ as this will provide flexibility in case the product is not well accepted and you need emergency resource to fix it ASAP. If this happens, it will be hard if not impossible, to recruit the additional resource on a short notice. Also, it will be easy to cease operations if you decide to do so, because you will have no employees.

 

5.Marketing

The marketing strategy is extremely important but it will not be easy to attract an industry expert on a tight budget. It is not just the budget, but also the career development opportunities, the scale and complexity, the high level experts are used to and are looking for. Instead of hiring on a full time basis, consider working with an expert on the strategy plan only. Sometimes it will be possible to secure an expert advice offering ‘’sweat equity’’ if the business model is promising enough to attract the attention of a high caliber expert. Once you have the marketing strategy plan, it will be possible to hire people with a 3-5 years of industry experience to execute it.

You may outsource some repetitive tasks such as blog writing, posting on social media channels, interaction with the followers, etc. This could save costs and help reconcile the cultural differences across multiple markets. It is especially valid if you operate both in Europe and Asia.