Startup teams, don’t wait until you’re out of money to realize these truths

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Preface: There is a saying in the entrepreneurial world that "successful people are similar, but those who fail are different." However, are there really many reasons for startups to fail? When a company is on the verge of bankruptcy, what should it do to resolve the crisis? Let's listen to the views of Sun Zhichao, investment manager of Sinovation Ventures!

Once we break up, it's that simple

More than 90% of startups break up for one reason: running out of money. For the remaining few, it may be due to disagreements in ideas or unfair distribution of benefits, or the elimination of core members due to conflicts over control. Among these situations, most can still survive, and only a very small number of them become too big and end up closing down.

The CEO of Secret saw that the situation was not good, and the money had not been spent yet, so he closed the company and returned most of the remaining money to the shareholders. He still had a conscience. However, this is not the norm. Most entrepreneurs will use their willpower to hold on until the last moment, and will only declare the company bankrupt when they can no longer do it. At this time, the asset liquidation procedure must be carried out. The remaining assets will be used to pay off debts first and then shareholders. However, the company has no money, and liquidation will not be able to squeeze out anything. Of course, you can also choose to temporarily suspend business. Suspension of business does not require asset liquidation, which is considered to leave a way out, but investors are usually unwilling to do so because they have joint and several liability as shareholders.

In any case, no one wants to go bankrupt, so in addition to making money quickly, the company must save as much as possible.

One of my previous portfolios was not a big company, with less than 20 employees, but the monthly cost was close to 400,000 yuan. On the surface, it seemed that they did not spend money recklessly, but upon closer inspection, they paid tens of thousands of yuan in rent a month. The equipment was all new, with more than 30 seats and several rooms, but the space utilization rate was less than half. There was free coffee, and snacks were often replenished in the conference room. The employees were paid very well, and they also had normal benefits. They even booked hotels and air tickets through a special travel agency to prepay. Even though they did not make any money, they still gave bonuses. Although this was outrageous, it happened. When the money was about to run out, the company was in danger and was easily defeated.

When we were running out of money, I suggested that we not pay salaries or reduce salaries to get by, but neither the old employees nor the founders would accept it. Why? Because once we cut costs, we will face various difficulties. It is troublesome to move the company, employees will leave, and all kinds of resistance and excuses will appear. No one will be happy with a lower salary, so we can’t do anything if we are hesitant and want harmony. These are all caused by bad management inertia. Entrepreneurs are also human beings. They don’t like changes and are afraid of uncertainty. It is difficult to cut off your own hands. For startups that have just started, they don’t feel much about money. If they have a large amount of initial funds to use and there are so many things to do, who will spend too much energy to manage small things such as rent? However, the devil is in the details. If you have the wrong attitude towards money at the beginning, failure will beckon you.

Every company has gone through the journey of starting from scratch. Today's big companies are the small companies of the past, but they are successful. Their money is also earned one or two dollars, and saved one cent at a time. The failure of small companies is often because they have burned through their money and have not earned enough money. The last straw may be some extremely unimportant small things that you may have disdained. For example, rent, interest, social security, these small amounts of money in your financial report, raindrops wear away stones, and their long-term lethality is extremely terrible. If you can't take precautions before it happens, it is normal for a penny to kill a hero.

Heroes are accustomed to eating meat and drinking wine in big bowls, so they are naturally short of money. Even if they have good kung fu, they will be dominated by money. If they don't want to be trapped by money, the first thing they must learn is to spend less than others and not need so much money.

Entrepreneurship is about risking one's life and then surviving

Calculate the cost carefully, know how much money you have to spend, and how to save money. But why does almost every entrepreneur make the mistake of having no money to spend? Because saving money is not just to avoid the company from going bankrupt after running out of money, it is mainly due to two reasons:

1. The lower the cost, the easier it is to survive.

As long as the monthly income is greater than the expenditure, the company will be invincible, and the quantitative change will lead to qualitative change: a company that is not easy to fail will certainly have a much higher chance of success. The main purpose of starting a business is to grow and eventually make money, while the purpose of saving money is to maximize the value of the money earned.

2. You need to feel pain to have feelings.

The founder must feel the pain, and even the directors and shareholders must feel the pain of impending loss. Only by putting all efforts into the desperate situation and leaving nothing behind can the company be revived. Employees must also understand the difficulties of the company, and let those who cannot accept it leave early. Employees who believe in the company's vision and are willing to work together can empathize with the company, see hope in adversity, and see the specific practices of the leaders. Only when everyone is united can they truly move towards success. Even if your company is not in danger yet, do this early, and don't do it when there is little cash left. The pain index will be much lower.

However, even if the money is burned out, there are ways to survive. Before I got the investment, my other portfolio had already burned out the money from the previous round of investment for half a year. It sounds easy to survive by being self-sufficient, but it is actually very difficult to do. The real invincibility is that the monthly fixed income is higher than the expenditure, but it is really not an easy thing to have a fixed income. Even if there is a source of income, in reality, your company is small and others are big, and you need money more, so the bargaining chips are inherently unfair. It is easy to say that a startup company that starts from scratch is self-sufficient and invincible, but it is not easy to do it.

First, “survive”, then talk about “how big to grow”

It is not so important to choose the right direction for your first business. As long as there is not too much deviation, you can go a long way even if you are not optimistic. Moreover, it is more important to learn how to survive before you are qualified to talk about "how big to go". For first-time entrepreneurs, learning to save money is probably more important than learning to spend money.

1. Lower rent

Logically speaking, if you choose a safe and convenient location in the suburbs, the rent can be much cheaper, but why do some people still spend a lot of money on rent? In fact, it is mainly a matter of face, but this is not entirely due to vanity: employees may not come if they see a bad office, and customers may have doubts when they see a bad company facade. In fact, this is easy to solve. Rent a workstation in the incubator and use the public space to display the facade. Of course, the disadvantage is that there are occasional inspections by leaders and various meetings. Some incubators also require equity or commissions, so you have to be patient in this regard. In addition, it is now popular to share office space and start a business together. Anyway, everyone has their own needs. As long as it is cheap and you can start a business without being disturbed, why bother about face?

2. Try to save money on equipment and supplies

After the company opens, it is inevitable to spend money on equipment and daily necessities. At this time, if you can use second-hand equipment instead, try not to spend a lot of money to buy new configurations, especially those large office equipment with strong special features, because if you don’t use them in the future and want to resell them, it will be very difficult to sell them. If you are a small business, you may consider renting office furniture and equipment, such as filing cabinets and printers, so that you can save a huge one-time expense. Later, as the company grows larger, you can re-evaluate the feasibility of purchasing these equipment yourself.

3. Try bartering more often

In the early stages of a company's business, if it can use its expertise or products to obtain free services or goods through "barter", it can also help the company save a lot of money.

At the same time, making more use of social media can increase the exposure of yourself and your company, and you can also use it to get in touch with professionals or business owners in the same field. The "barter" method requires high professional skills, and this transaction can only be completed in a win-win situation.

4. Get more discounts on high-quality products

Free or low-priced products are usually not as good as expected. If you choose cheap or even free products for servers, software, or page design, which are related to work efficiency and overall image, you may end up ruining a company because of functional defects. Instead of buying low-priced goods or using free things to save money, it is better to choose high-quality products and then try to find discounts from merchants. Spend some time searching on B2B websites and you will find many websites that offer discounts on corporate products, such as printers, phone systems, or cloud services. Or you can go to nearby merchants to check related products and see if there are any promotional plans. Sometimes stores or merchants will provide discounts or fixed discounts for specific groups (such as alumni associations or chambers of commerce).

5. Reduce expenses on recurring costs

At the beginning of starting a business, investing a lot of money in marketing and advertising may burn all the money in a short time. You can use more free or relatively low-cost ways and channels to spread the company's reputation and image. Or hire interns or remote part-time workers to reduce personnel costs, and then hire full-time professionals when the business is stable and the prospects are getting better.

At the same time, it is also necessary to reduce personal living expenses as much as possible, such as using public transportation instead of driving, reducing the number of meals out, or moving to a cheaper place. The money saved on personal living expenses can be diverted to company operations. You must be mentally prepared to cut down on all unnecessary expenses and personal expenses.

6. Reduce base salary

Generally speaking, the biggest expense in the early stages of a startup is still personnel expenses. And because good talent is hard to find, sometimes the salary will be higher than the general market price in order to snatch good talent from the eyes of large companies. However, it is still recommended not to use a single high base salary system, but to use a low base salary, plus flexible performance-based work bonuses. If employees accept, bonuses can also be paid in stocks, and the company's cash demand will be lower. If it is a short-term, irregular work demand, try to use outsourced personnel to handle it. In addition, you can use more interns. On the one hand, the cost is low, and on the other hand, teaching and learning can benefit both parties.

Another important benefit of a low base salary is that social security will also be low. Unless it is a fixed monthly bonus, there is no need to deduct fees for irregular incentive bonuses. If you save money, your employees will also save money, and their rights will not be affected at all. Please discuss with your accountant how to save money on the five insurances and one fund, and how to do it best to protect the maximum rights of both parties. You also need to explain it clearly to your employees.

7. Spend your money wisely

Many startups now spend a lot of money hiring professionals to help design websites, products, etc. before they actually start their business. When they really start, they find that they don’t have enough money to promote their products and services. If your budget is limited, it is recommended that you buy a ready-made website structure at the beginning, and then upgrade your own website and services when your services are getting better and better and you start to earn real income. The most important thing about starting a business is to spend money wisely, so it is recommended that you spend money where it should be spent in the early stage, such as the promotion costs after the product is launched.

8. Keep track of every expense you can

In the early stage of starting a business, the speed at which money is burned every day is far beyond your imagination. As an entrepreneur, you must know where every expense is spent. Is it necessary? This must be clearly recorded. If you are not clear and follow up, you will find that the money has been burned and you don’t know where it was spent when you really need money. It will be too late to regret it afterwards.

9. Try to practice it yourself

There are some jobs you can't do, which is completely different from some jobs you don't want to do. If you come from a marketing background, you naturally can't write programs, so you may need to find someone who can take charge of the technical aspects to assist you or outsource. But if you are just asked to do accounting or painting related work today, these are actually jobs that can be mastered in a short time. If you simply don't want to do it today and deliberately find someone else to do it, this is an extra unnecessary expense.

10. Find ways to generate income early

As an entrepreneur, you need to come up with some ways to make money quickly to support the company. Some people are lucky because their ideas are appreciated by investors and they get a large amount of investment in the early stage, so they don’t have to worry about the company not making money to support the company, but if you don’t have funds today, you need to find a way to make the company earn quickly, even if the growth becomes slow, but at least it is healthy.

11. Reduce marketing expenses

If the product is ready, you can consider letting users actively promote it in the early stage. In fact, most people like to show off new things, which is an excellent promotional channel, so you have to seriously think about how to make your early users fall in love with your products and services and actively share them on their social networks to help you promote. Most people go to social networks simply to interact with more people, so it is not suitable to use traditional models such as fixed advertising lines, but to have better exchanges and communication with users. Only by doing this can they more effectively improve the conversion rate, and only in this way can they gain more loyal customers and new customers.

In addition, you don’t necessarily need a large budget to enhance your brand image. In fact, there are many ways to effectively promote your brand image. For example, many manufacturers now use online videos to shape their brand image. The budget is not high, but you can promote your brand concept through storytelling. If you can make users empathize with your creativity today, they will be happy to share it with their friends, and this will gradually form viral marketing.

In fact, learning to save money is just the beginning, and learning to spend money is just a prerequisite. After you have the foundation for starting a business, thinking about each step of the company's development strategy will become the most important link, because it determines whether you can raise funds, whether you can continue to raise funds, whether you can raise funds quickly, and whether you can keep your financing investigation stage in the growth stage.

When the day comes when we run out of ammunition and food

The pain experienced at each stage of entrepreneurship is different. There is no way to compare the pain of having no funds and the pain of later business development. It is difficult to express in words and can only be understood. The bigger the company, the higher the responsibility of the person in charge, and the more pain you experience, but after experiencing it, you will feel at ease when doing other things, provided that you stick to it. What if you have no money? What if financing is not smooth? What if the technical director runs away? If you quit a company when it is not doing well, you are a loser. If you transform and sell a company when it is rising, you are still a successful entrepreneur. Therefore, if you want to be a successful entrepreneur, you must endure the most difficult time. And many first-time entrepreneurs, by the time they find themselves entering the hard stage, they have spent too much money.

If the company really reaches the point where the money is burned out and the money earned is not enough, if the company is really pessimistic about the future, it may be necessary to set a stop loss point here to leave some opportunities to make up for the loss next time. However, entrepreneurs generally will not give up so quickly. As long as there is a glimmer of hope, but the financing is insufficient, they may even borrow money to tide over the difficulties. It is easy to borrow 100,000 or 200,000 yuan, but once it is all used up and even the interest can hardly be paid, then it will really enter a dark period.

The first thing that will happen is that you cannot pay the salary. Once you owe the salary, some employees will definitely leave and may even sue you, but there will definitely be employees who are willing to stay. Some of them are really not doing well outside. Although they owe you the salary here, at least there is still a chance. These employees have to be reluctant to leave no matter what, but some of them really see the opportunity and are unwilling to give up. These are your true good brothers. Although the salary is owed first, it may be exchanged for stocks, and you must pay it back double in the future. But the salary can be owed first, but the social security cannot be unpaid. If the arrears exceed a few months, once the employees sue, the lawyer's letter will be sent to your home, threatening to auction your property. You are in the wrong for owing the fees, so you have to admit it. Try to pay it as soon as you have money. As for the rent, it is also something that cannot be owed, because the landlord can drive you away. The property management will come and tell your employees that the boss can't pay the rent. It would be strange if the employees are not scared away. Of course, the most terrible thing is the interest. If you can't pay it on time, it will be a serious crisis for both the bank and the individual. This is probably the real last straw.

Seeing this, what I want to say is that no one wants to reach this point, so save as much as possible, make profits early, and run a good company to make money or get investment. But if you are unfortunate enough to reach this point, and are forced into a corner by these so-called small amounts of money, your heroic ambitions will be gone, and everyone will go their separate ways.