The tech space is a crowded, fiercely competitive one, and simply having a great idea won’t cut it. If you have your hands full with developing, optimizing, manufacturing and marketing your product or services, then you may not have the time to keep an eye on your accounts day to day or focus on the big picture financial decisions.
In other cases, you simply might have some misconceptions about the business that lead you to making bad decisions based on assumptions. Either way, you can always avoid making mistakes by learning from others. Here are some common financial mistakes tech startups should avoid at all costs.
Not Shopping Around
As a tech startup, you have to take advantage of the quasi infinite number of suppliers available to you. You may have fallen for a rep’s pitch, and actually be getting a deal you think you can work with. But know that you may be competing with giants who can benefit from economies of scale and trump you in buying power.
The only way that you can close the gap is to shop around. If you’re looking for anything like integrated circuits, test equipment and tools, or supplies like cables and wires, you can check out an electronic parts search engine like Octopart. You’ll be able to look up datasheets, compare millions of different parts, and buy directly from hundreds of distributors.
Not Calculating Cash Burn Properly
Your cash burn is the amount of money you spend every month to keep the business running. Unless you know what that is, you’ll struggle with meeting your objectives before the cash well dries up. About a third of business owners admitted that they made miscalculations when it came to operating costs, with 1 out of 5 realizing at some point that they needed financing according to a recent survey.
The first thing you’ll have to do is come up with a bottom up projection, and make sure that you use real world variables. Top down projections tend to be too rosy, and rely on variables that you won’t always have control over, like projected sales or market share gains, for instance. But with a bottom up projection, your operational costs, which are easier to predict, come first. You’ll also be forced to look at your current assets instead of focusing on possible expansion. Which leads to our next point.
Expanding and Hiring too Quickly
People are usually the biggest expense for any tech startup, and you should never make the mistake of hiring too many people too quickly. You can have a core of engineers, and work with contract workers when you’re in a crunch or need someone with a specialized skill set to bring their expertise and look at your designs with a fresh pair of eyes. Don’t assume that you absolutely need to have your accounting, payroll, or HR in house either. These can all be outsourced as well.
Outsourcing can take the form of getting a tech company to look after your software and hardware, and learning to manage IT companies or any resource externally is a skill we all have to acquire. But the fact remains, if you hire too many people in-house and they don’t have the skills, you may find yourself draining your cash and resources.
Over-expanding too fast is another issue. Having to downsize or lay off people just because you didn’t meet objectives will poorly reflect on your brand, and do additional damage that could’ve been easily avoided if you moved more cautiously.
All these mistakes could have a serious effect on your startup, and leave it dead in the water if you’re just taking off. Make sure that you steer away from these, and, when in doubt, always choose the side of caution instead of blind optimism.