Stayin’ alive! How a good financial tool can save startups from failing
Wout Bobbink, 5 August 2016
A recent study by marketing agency FRACTL (2015), also quoted by Alex Osterwalder (‘the father of business modelling’), shows that more than one-third of startups that fail don’t make it either because they run out of cash or because they cannot raise investment. By splitting the startups into funded and unfunded ventures, FRACTL provides a surprising insight: running out of cash is one of the main causes for failure especially for startups that are funded.
Alex Osterwalder concludes this is because startups “are more likely to risk building something that nobody wants when they have the money to actually build it”. However, it could also imply something much more straightforward: that besides raising money, actually managing the funding raised proves to be a very challenging task.
Currently most startups try to solve this by building a financial plan in Microsoft Excel. However, Excel will not help the entrepreneur to actually understand, let alone improve their financials, nor will it suggest what business decisions to take to improve financial performance.
Especially startups that have not raised funding yet, try to overcome this by hacking together a plan using free advice of acquaintances that have a finance background. Benjamin Tchang, CEO and co-founder of medtech startup Usono explains: “We could hire a financial consultant or a CFO to get more professional insights in our financials, but that is a costly solution”.
Nina Hoff, CEO of 3D printing company byFlow adds to that: “When we started engaging with investors for the first time, we built a proper financial forecast in Excel that was in line with our business plan and that could help convince investors of our potential. That’s already a very challenging task if you don’t have a finance background. But once you’ve actually raised investment, the real challenge arises: regularly forecasting and keeping track of spending to estimate when you will become profitable or when more cash needs arise.”
Besides these more old-fashioned or costly ways to manage financials, new solutions are appearing on the horizon. Alexander Matthiessen, CEO of Finance Navigator, an EY startup that is the online CFO for startups, explains that he and his two co-founders started their company especially because they saw so many other startups get into trouble: “As a startup, you are always struggling with cash, whether you are looking to raise funding or you have successfully secured investment and now need to manage your cash.”
Alexander adds: “As an entrepreneur you want to focus on what you’re good at and on what you love doing: building your business. You don’t want to focus on something you might be less good at and don’t like doing: building and managing your financial plan. At Finance Navigator, we help startups raise the amount of funding they need, and once the money is in, we help them manage it.”
Alexander: “We are currently building the first version of our product, that we will release in September, and are trying to figure out how we can help the startups in the best possible way. We do notice that they are definitely looking for help, as finance remains a difficult topic.”
“That’s why we have come up with a product that gives startups automated tips to make sure their financial plan is top-notch. If they have reached that stage we open up their plan to the investor pool we are currently building. Next to that our tool alerts the startups for potential problems with their cash, just like a real startup CFO would do.”
Finance Navigator is not alone in its quest to help startups raise funding and manage their financials. Many accelerators have identified the same problem. Guus Frericks, Co-founder and Managing Director at HighTechXL – the hardware accelerator in Eindhoven says: “In our accelerator, we have seen so many promising startups with great teams and products, but even the best teams struggle with their financials. Getting this right takes time, blood, sweat and tears; but it is crucial to survive as a business. At HighTechXL, we are adopting Finance Navigator to make sure our startups are in control of their financials and can focus on what they do best: develop their business”.
FRACTL’s research implies that next to the everlasting challenge of raising capital, managing the money raised should not be underestimated either. Alex Osterwalder argues that cash issues are in fact caused by business model problems, but in essence both issues are simply two sides of the same coin.
The only difference for startups is that building and managing a business model is a hard nut to crack, but building and managing a proper financial plan maybe even harder. Therefore, it is about time more and more solutions arise to reduce the rate of startup failure resulting from financially-related causes.