Login Register
Follow Us

How to survive funding crunch?

Fast growth start-ups are like rockets.

Show comments

Ambarish Gupta

Fast growth start-ups are like rockets. There are no steering and no brakes. It either goes up or goes down. There are no sideway movements. Every founder of a company knows this but ignores when the money is available and emotions are running high.

However, start-up journeys have hiccups. Someone said that start-up like this will have a near death experience every 18 months. If the start-up is not designed well, these near-dealth experiences can turn into real mortality. and if done well, these can survive and emerge stronger and better than before. Here’s how a funding crunch crisis can be survived: 

Build an extended founder group of early employees

Most of the start-ups have one or two founders. But remember that great companies are not run by two people. You need an extended group of, probably a dozen of so of employees who feel about the company and the vision as strongly as you do. You have to provide them with a lot of independence, career growth, responsibilities and compensate them with equity. It is a good idea to put aside around 10 per cent of the company as ESOP for such a group of employees. While 10 per cent is quite a bit of stocks, it can build a strong sense of commitment in a group of employees who will fight as hard as you do when the company faces challenges.

Always remain frugal

Great companies have been built with frugality at heart. Amazon famously used tables made from office doors. Google built their own servers with inexpensive hard drives they bought from local stores. When Elon Musk failed to buy cheap rockets from Russia, he decided to built from scratch. Jio bought the underlying telecom hardware at rock-bottom prices from global vendors. 

Frugality allows you to go further than your competitors would with the same cost. It also instills a top down vision in the organisation of stretching your money.

 This will be very helpful when you really need it. Eventually every company does. Even Uber, the money burning start-up, is going through its cost saving experiences today.

There are many ways you can remain frugal. Do not spend too much money on fancy offices. If the employees are motivated, the office location is not going to make much difference. Hire for attitude and competence rather than experience. You can hire inexpensive young college grads and have them learn on the job rather than hiring expensive industry veterans. These heavy weights always bring with their own set of costs and working styles. instead of paying in cash for various expenses, use barter and partnerships as needed.

 Give away your software to partners in exchange for media mention. Instead of hiring engineers to build your software you can look at freelancers to do it for you. When you include all the costs of hiring, training etc of engineers, it may be better to have another company develop your app.

Use Open Source Technologies

Most of the commercial grade technologies have their own open source counterparts. Open Source technologies: Linux, Mozilla, OpenERP are free to use and modify with even their source code available. Use this extensively in your office and in your product. This will make sure that you don’t have to pay expensive licensing fees to commercial software vendors. Using Open Source Technologies to build your software also means that you will have higher profit margins in your product. Google, Hotmail, Amazon Web services, Redhat etc are built with open source technologies at the core of their products.

Train your customers to prepay or pay on time

If your customers are not paying or paying late, it can be very painful for the startup. The company has already spent money in providing the services. In the absence of the payment, the customer incurs loss rather than providing profits. This is a double whammy.

 It is best to provide discounts and have the customer prepay before using the services. In case this is not possible, try getting them to pay on time else pay penalties. This will allow you to manage the cash flows in the company.

The purpose of the business is to eventually make money. It may not be required today but eventually it will be required. Google, Apple, Amazon, Microsoft: all of these make profits. Uber, Ola, Flipkart may be making losses today but eventually will have to demonstrate profits. Keeping this in mind as you build up a business will not only allow you build bigger business with lower investments, survive any number of funding crunches in the market, it will also allow you to do a great IPO when you eventually do. 


Have a profitability plan

When the money flows, it is easy to take eyes off from expenses and focus on growth at all costs. However, this way of thinking comes with the challenge of nasty surprises in case the money stops flowing. On the other hand, if you were to just focus on profitability right from the beginning, you may not grow as fast as your peers and miss out strategic opportunities. The right thing to do is to balance these two out. While you grow as fast as you can, keep a plan B in the back-pocket if something goes wrong with the fund raising process. The investment world comes with its own quirks and typically have boom and bust cycles. You want to have your company survive that. With such plan B, you can build a high growth company at your own terms and not be too dependent on the investment cycles.

— The writer is Former Founder, Knowlarity Communications 

Show comments
Show comments

Top News

Most Read In 24 Hours