Launching a startup is not easy, but being aware of these common mistakes and how they can be avoided is a sure way of stacking the odds in your favour, says Eugene Rudenko, senior online marketing manager for Oxagile, a software development company with experience in collaborating with tech startups from all over the world.
Two of the biggest mistakes startups often struggle with is understanding their business model and the financial projections required by investors.
Business model mistakes to avoid
Accurately assessing your potential market is a pretty hot issue in the startup world, says Rudenko in a recent Bizcommunity article.
“There are two extremes here. On the one hand, the market can boast of large numbers but the real profit is not so big. As a result, you get something closer to a small business, rather than a startup, without any possibilities to scale things up.
“On the other hand, calculations done in a wrong way can lead to such enormous figures like trillions of dollars. The problem here is that during the calculation process an entrepreneur hasn’t segmented the market. What is more, it’s impossible to conquer the whole market. All successful business models are niche-concentrated,” says Rudenko.
Using the wrong formula for calculations is another contributing factor to such figures, he says and explains, “Very often, entrepreneurs use the following pattern for calculation: they take the largest production volume possible (which is very often hard to reach, to be honest) and multiply it by the product’s price. The problem here is that such calculations will show you your potential profit, not market. In order to get real numbers you need to get some statistical data from research either done by you or (as the former variant is rather expensive) by some experts in your niche.”
Why you are not an Uber
Be careful when comparing your startup to other businesses when speaking to potential investors, says Rudenko. As tempting as it may be to brag, “My startup is like a Twitter/Twitch/Uber”, be sure you are comparing apples with apples, he says.
“The use of big names while describing the potential of your startup is aimed at showing that this very startup can be as big as a business mentioned above. The possible problem here is that very often the comparison is made between companies with absolutely different business models, but which may look a little bit similar to an inexperienced eye.
“If you have encountered an active investor who is into your niche, then chances are that you’ve just lost your opportunity. Comparing businesses with different business models will tell your investor that you don’t understand how business processes are set up.”
Big financial errors
As important as acquiring the funding for your startup is, you don’t want to lose potential investment by being too casual with your numbers.
Round sums, which are usually declared for startup development and promotion, can be seen as a red flag, says Rudenko.
“More often we can see such numbers as $500k, $200k, etc.” he says and explains, “Everything revolves around round sums. For really well-planned financial models, 99% will not show you a round sum. So, from my point of view, a person who asks for $83,000 instead of $100,000 will have a better chance to get that money. It demonstrates your attitude to investor’s money and the way you’re going to spend it. So you need to be careful and prepared to be able to find proper investments for your startup.”
Rudenko says startup owners sometimes fish for unrealistic sums, even as much as $1bln. “When asked about how they’ve come up with such a sum, entrepreneurs usually mention some last steps in product development that need financing and such things. Some may tell you about marketing and sales expenses. But the thing is that 7-figure numbers may be a strong indication that the guys behind a startup just haven’t bothered themselves with precise calculation.”
Sometimes money is not the answer
Rudenko advises entrepreneurs to ask investors if they can render non-financial assistance before talking about investments into your startup. Sometimes, he says, you may find backing that turns out to be much more valuable.
