4 Ways Startups Waste Money

One thing that can cause early-stage startup founders a lot of worries is managing finances. We want to invest in our company, but where do we draw the line between being sensible and reckless spending?

Startups usually spend more than they make. If one can’t manage to raise any more money, running out of capital means bankruptcy is inevitable. Two of the most important benchmarks for any company or project are monthly burn rate and cash levels. If you’re within 3-6 months of running out of funds, you’ll need to either find a new source of income or be in big trouble.

Fret not, as this article guides you through the 4 mistakes that could prove fatal to your business' success. The last one may surprise you. 

1. Spending big on advertising

Advertising is an important marketing function for any business, especially those looking to grow. It helps to build your brand and both drive traffic and turn them into customers for your goods. This can be done through raising brand awareness or providing keywords to users looking for products like yours.

To convince customers to purchase from you, utilizing such opportunities is important. Paid search campaigns are a great way to increase your brand's awareness in search engine results pages. This type of marketing allows you to rank high for relevant keywords and generate customer interest in your product or service.

You can also use offline ads to increase impact and memorability of your brand. Printed advertising has an extensive reach and will help you make an impression on many different buyers out in the real world. 

But there is no restriction to how much you could spend on ads.

With so many different networks, channels, and potential audiences, it's easy to spend a lot of money. Fast. There are so many different interests to cater to, demographics you can target, and many ad types you can do that can drain your budget if not managed appropriately.

So if you're thinking of spending another 10% on ads, you may want to think again. 

“Initially, you're looking to get the first thousand customers on board and not millions. It is not advisable to go for mass advertising because the product has not yet been proven. You could be destroyed in one shot. No startup can recover from a mass failure like that,” says Saurabh Uboweja, founder and CEO of Brands of Desire.

You're not going to learn that much from just plowing a bunch of money into ads early on into your company. Startup can't grow by ads alone so be careful not to get dependent on them. 

Check out this awesome article to learn how to promote without advertising.

2. Hiring a PR agency

No matter the size, every company relies on its reputation for success. PR is a crucial management tool that can be used to help achieve goals and improve image. The public relations process includes creating, maintaining, and managing overall perceptions of a company and its ability to affect change in the world.

If a startup has just launched, it is essential to build a positive online reputation to attract customers. Making sure your business is well-ranked with popular platforms such as Google can keep negative content from forming and ensure you have the best chance for success in years to come.

However, does a startup company really need to spend money on hiring a PR agency?

Media is a very mysterious industry; for many, it can seem out of reach. Many startup founders are fueled up by reading a ton of startup media, so the bylines and those with big audiences on social media they came across can seem very distant. And so it's very tempting when someone comes along and says, "You know I'm actually friends with these people. And if you pay me a monthly retainer, I'll be able to get your stories in front of them."

But in the end, it's up to you to build those relationships, not a PR agency. Journalists want to know what your business is up to and will want a direct line of contact to get the latest news. They do not need intermediaries there. 

Check out this article to learn more about how to build relationships with journalists.

3. Paying for an adviser

A business advisor is a mentor who can keep you accountable and provide guidance on various aspects of your business, such as strategic planning, marketing, and finance. An advisor also has the expertise to coach you or your team through any challenge that may come up.

Running a business is an extremely challenging task, and it’s crucial to have proper perspective. Your thoughts and feelings can be great sources of insight, but sometimes you need someone else (who is unbiased) to offer their opinion. A second pair of eyes can tremendously help you make the best choice possible which will lead to positive growth.

Great advice are free.

But although advice definitely makes a difference, it's almost always the case that advice comes from someone who isn't a specialist advisor. But rather from an investor in your company or just someone you were introduced to as a domain expert who just gave you that advice for free. These people didn't want money or equity. They just wanted to help out.

In the entrepreneurial ecosystem, many people try to make money on startups by selling them advice or collecting percentages. But those who are successful just don't have time for such. Even if they want to charge you, the amount of time it would take them to figure out the amount of their service is not going to be profitable for them. It's way easier for them to give the advice away free of charge. 

Check out The 8 Best Sites to Get Good Free Advice Online to learn more.

4. Hiring a FANG engineer

Recruiting employees is one of the most crucial parts of any organization. Finding the right person for an open job is crucial, and timing is essential, so getting it right from the beginning will make everything easier in the future. Recruiters need to consider what worked with previous employees and what kind of people the company needs to focus on.

Cons of Hiring

But despite the benefits, expanding your staff and determining the right fit can be challenging and may result in some drawbacks.

"Hiring, in general, doesn't mean moving faster," Harj Taggar, a Group Partner at Y Combinator, said. For many startups, one of the first decisions to make is who to hire and how many. While some do it too soon to be prepared for a rapid change (and instead find themselves out of money faster than they expected), others overhire in anticipation of growth and wind up with an unsustainable number of people on staff.

It's stressful when you run out of people to complete a job. But running out of funds while hiring and overpaying is worse.

How about hiring FANG engineers?

A lot of startups are caught up with the idea of hiring FANG engineers with their level of skill and experience. As these guys are super qualified, they're going to be a dream hire.

It's difficult not to hope that somewhere out there, someone can come in and make a giant leap forward in your productivity and fix all the problems your business has. There's a name for this. It's called Sebastianism. It's this Portuguese myth that King Sebastian will return after being lost in battle hundreds of years ago and solve all the country's problems. And this is the same thinking of many startups out there. There's this mythical thing called an engineer or salesperson that's supposed to come and make everything work.

The catch is that Google engineers can get a million dollars a year between salary and equity, so startups need to offer similar wages to attract them. Plus, talent does not guarantee compatibility. You might be seeing someone extremely talented but extremely talented in a FANG system but may not bring the same level of productivity to your company.

Product-market fit

We looked at all the things you should not spend money on. But we can see that big, successful businesses spend money on these things. So when would be the perfect time to do so?

Quick answer: Once you have product-market fit.

Product-market fit is when the target audience for your product is satisfied, buying and using the product enough to grow and make a profit. It's when you have customers trying to take your product away from your hands, and you know that the product has a future in generating more revenue.

That's when companies end up making these crucial spending decisions mentioned above. Unfortunately, we run into people who are not in that place but still have the money, so they're spending it on this stuff.

So be careful if you're in this position.

Develop a frugal mindset to understand that having a lot of money isn't the solution to everything. Be creative and figure out the cheapest way of testing your product and putting it out there to see what is working and what isn't.