Sales Cycles & Business Failure
Talking with a former student of mine yesterday who is involved with a startup got me thinking: can something as simple as a sales cycle cause failure for a startup?
For some B-to-B firms, it can take a long time to not only get a customer but get paid. There are hoops to jump through, budget cycles to match up with, and multiple decision-makers and influencers. All the while, the company must continue its operations, hence, burn cash. For established firms, this is no surprise.
But for startups, this can be a make-or-break. Why?
Most startups grossly underestimate cash outflows and grossly overestimate cash inflows from revenue. That creates a gap from the start which only widens as time goes on, and creates a situation which is impossible to catch up with. What’s the solution?
- Keep startup costs ridiculously low, including founder salaries
- Raise 2-3 times the money you think you need, and don’t go into business until you have it
- Find markets with shorter sales cycles
- Sell smaller contracts (companies often have simpler practices for purchases less than $5,000)
- Scrap the whole idea and go B-to-C
Hey Raman – Good post…cash flow is one of those important details that us wide-eyed entrepreneurs too often overlook. It’s much more fun day dreaming about yachts :) I’d also add charging up front to your list. It won’t work in many scenarios, but when it does it saves a lot of financing headaches.
Yes, Ryan, you’re right. I’m hearing that charging up front is harder today than it was a few years ago, but certainly an option that one must try.
Raman: Nice points. Paradoxically, slowing down your sales can also sometimes help. If you’re profitable but your cash cycle isn’t fast enough to cover your growth, putting the brakes on can be a less bad solution than getting into debt trouble.
Good suggestion, Steve. I like the idea of a “less bad situation”. We don’t think like that too often, and it can be a terrific option when we’re in a bind.
Ha! very timely. You forgot another solution: push through blindly, while failing and learning, not taking no for an answer and actually succeeding at it!
You’re right, Mike. What almost everyone ends up doing, although I wish more would indeed actually succeed!