The top three challenges every early stage company will face
Early stage companies may be known for their unique and innovative ideas. Yet each will face their own version of the same three critical challenges that plague virtually all new companies. What will differentiate the successful businesses is the speed at which each is able to address these three challenges and continue moving forward on their growth agenda.
First, it likely will come as no surprise that the biggest and most ongoing challenge facing any early stage organization is a lack of money. What may surprise you is that “no money” is not the same as “not successful.”
David Stevens, a senior advisor with Deloitte Private Consulting, describes a major retail app as an example. “The company is about two-and-a-half years old. They’ve got a really good client base. And they’re out of cash.” In that particular case, the issue wasn’t a lack of success. It’s that the launch of the company left it with little financing to sustain its planned growth.
Early stage companies need funding at every stage of their development. From initial seed financing through subsequent raises, knowing how much to ask for, at what price, and with what partners, is critical. Stevens notes: “We often see companies undercapitalized but over allocated in terms of equity positions. Initial funding was too expensive in terms of the initial valuation, and monies raised were not sufficient to see them through their early stages.” Understanding both the short- and medium-term burn rate is critical to a successful raise if other revenue sources do not come through fast enough.
Working with your investors, partners and advisors who have an interest in your long-term success is essential. Experienced partners will be able to suggest proven approaches and money-raising strategies you might not think of on your own. And that same partner might have the connections and credibility to secure meetings with the potential investors that you might not have access to otherwise.
Leveraging these partners will also allow early stage Founders to be able to look at cash-flow projections independently and identify the circumstances in which you might run into trouble down the road. You’ll then have enough time to take action, whether it’s kick-starting customer acquisition plans, revising your cost structure or developing a new go-to-market strategy.
Finally, when it comes to funding, remember that data is your ally. Many early stage companies take advantage of cloud-based financial collaboration platforms that automatically build data and apply analytics. They can then point to this data to make a case for investment from interested parties.
Second, the right customer makes all the difference.
“In the early stages, Founders are typically looking for any revenue source,” says David Stevens. “Incremental revenue is incremental revenue, but many times the first round of customers are neither strategic nor contributing to long-term value.” Instead, Stevens advises, “look at who you are really trying to serve and how profitably you are servicing them.”
One of the fundamental principles Stevens applies is customer segmentation strategies to determine if a customer is as vested in your success as they are in theirs. Have you developed a level of trust and mutual partnership that allows you to grow successfully and with the support of your customer? Or are you just another commodity provider that is neither strategic nor important to their long-term success? These are important considerations in the identification of the right customers to prioritize and partner with along your lifecycle. Revenue is crucial; the right revenue that facilitates longer term growth is even more important.
Third, because many Founders have often never run a company before, the road ahead is an unknown. This represents another significant challenge.
“Founders are terrific visionaries. They can see a future for their product or service but they often struggle with the realities of running a business,” says David Stevens. “Their focus on the art of the possible can overlook the mundane, and they might not realize the regulations they’re going to face, the compliance requirements, the grant opportunities available to them, or what communities might be available for advice and support.”
For example, when thinking about doing cross-border business or setting up in a new jurisdiction, many Founders are surprised to find that the rules around sales tax, R&D write-offs, or hiring policies can be very different from what we’re used to in Canada. In fact, with government regulations changing so quickly globally, it is important to do your research and protect yourself against future problems. Again, the right level of support from members of your investor group, who may have deeper experience, or through your advisors, who are current on the issues, is key. “We find the more we can shine a light down what would otherwise be an unknown path, the greater the opportunity for success for our Founders,” says David Stevens.
Every early stage company must face each of these challenges. Looking forward and actively involving business partners in your appreciation of the options available to you will position your business to confidently face the big challenges ahead and move forward, fast.
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