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Working with startup companies and entrepreneurs is a unique specialty and creates interesting and challenging work for a consultant. Not only do you have to define what is a startup (which is not a “one-size-fits-all” template), but it is also important to address startups’ ever-changing diverse needs due to rapid growth, changing directions and frequent priority switches at a moment’s notice. But as they say, if you love your job you never work a day in your life, and that is the best approach to startup consulting work.
Future growth opportunities aside, there are inherent challenges startup companies tend to face. Here are five lessons startups and entrepreneurs can glean from a veteran startup consultant:
1/ Make sound and timely bookkeeping a high priority.
When an entrepreneur is busy getting a startup off the ground, accounting and bookkeeping are often back-burner considerations. The day-to-day focus is consumed by operational tasks but there should be allotted time for managing the financial reporting process. Sound bookkeeping provides the clearest picture of a business’ health and lays the groundwork for the reliable financial information lenders and investors rely upon to gauge a loan or investment. It also sets the business up for proper tax filing. Unfortunately, too many startup companies do not have accurate financial data to file income tax returns or prepare financial statements. Without contemporaneous and accurate information, the resulting cost for these services is much higher than it needs to be.
2/ Appreciate the power of a valuation and its impact on maximizing investment dollars.
Potential investors want to know what your startup is worth, but startup companies don’t typically fit the traditional valuation framework. Formal valuations are incredibly expensive, comparable companies to use in the valuation study are difficult to find, and many startups don’t have any earnings history. Due to this disconnect, alternate methods may achieve better valuations that affect investors’ demands. To improve the prospect of maximizing and closing a round of funding, research your industry and become an expert at demonstrating why your product or service can maintain a share of the target market. Learn the characteristics of your value drivers as well as your weaknesses, and be able to discuss the areas that have room for improvement. Ultimately, entrepreneurs must be flexible to significant changes in their plans over the financing cycle for their startup.
3/ Be flexible, watch the cash flow and redirect expensive efforts when appropriate.
Spend your dollars carefully because once they are gone it is quite the journey to replenish them. For example, as your workers perform R&D, they drain cash quickly. Take the time to reassess and redirect your efforts if needed. Being flexible and adhering to budgets will help control the outflow. Reach out for counseling and listen to what is being advised.
4/ Don’t let cash be the main focus of operations and distract from the energy and momentum of business activities.
In the 2016 Brown Smith Wallace St. Louis Startup Survey Report, St. Louis startups, and the diverse community that supports them, indicated that cash flow was their greatest challenge. The time and additional funds actually spent by startups and entrepreneurs to obtain cash is frequently avoidable and indicates an area that requires assistance and support. Preparing cash flow statements, spending carefully and utilizing budgets are just a few of the management tools that should be employed. In addition, managing cash receipts and disbursements can reduce surprise expenditures such as tax liabilities. Cash basis is the preferred method on which startups base their tax reporting because it is simpler to administer and taxes are only due on money received and spent, which can be easily managed with careful planning.
5/ Be aware of the surrounding business climate, take advantage of its resources and understand that there will be volatility.
Recent data from the Kauffmann Foundation about startup communities across the country provided some good news for St. Louis. In the last three years, the percentage of startup companies in business for five years has grown. Business Insider also named St. Louis the fastest-growing startup scene.
Despite the growth in the local community, according to Pitchbook, the number of startups funded at the angel investor and seed stage levels nationwide has dropped for six straight quarters. Locally, some angel groups are still seeing good deal flow but are focusing on quality over quantity. As existing companies get to a point when an exit is imminent, capital could become freed up again and cause an uptick in new startup investments.
To learn more from startup veterans in St. Louis, visit bswllc.com to request an invitation to an upcoming panel discussion surrounding the second annual St. Louis Startup Community Survey findings.
EQ is partnering with Brown Smith Wallace to bring you a series of stories on topics like startup valuations, tax planning and more. Stay tuned for more posts from the Brown Smith Wallace St. Louis team.