Here are some of the most common mistakes made by today’s entrepreneurs.
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No. 1: Focus on the wrong numbers
Entrepreneurs commonly focus on revenue growth as the sole indicator of success, when they should look toward granular financial data. Revenue growth will indicate if a company is on track, but won’t yield the data needed to properly allocate resources and grow a company.
You need to understand how each dollar is derived. For instance, average revenue per customer (ARPU) gives a general look at the financial health of a company and can be used to measure against a peer group, but analyzing high revenue accounts will provide valuable data on a company’s most lucrative customers.
Know your numbers.
No. 2 Focus on external, instead of internal, capital
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Entrepreneurs spend a great deal of time focused on outside capital (which is dilutive) instead of internal capital (which is non-dilutive). Ironically, the higher the internal capital (i.e. revenue) the more attractive a company is to outside capital.
Whether a company is seeking venture capital dollars or seed funding from an angel investor, showing strong revenue will increase valuation and bolster chances of raising capital. Additionally, accepting too much external capital at a low valuation can dilute a company and leave the founders with a small piece of the pie.
On average, a company takes six to seven years to go public and may require three to four rounds of funding. Each round of venture capital funding will require 20% to 30% of the company’s equity. If a company begins receiving outside capital too early, and at a low valuation, they may over dilute their equity by the time they go public.
The best money you can raise is from your customers.
No. 3: Focus on unsustainable growth
Growth is rightfully perceived as a sign of success. Yet, if a company grows too quickly it is bound for failure. Entrepreneurs who follow a boom-and-bust cycle of expansion and retraction create low morale for staff and uncertainty for customers. This inevitably ends in failure.
You should develop a financial model with scenario analysis to obtain a realistic picture of the future. Steady and consistent growth ensures positive relationships and sustained operations. Rapid expansions during good times are short sighted. A company should grow at a conservative pace if it wants longevity.
Slow and steady wins the race.
Lili Balfour is the founder of Atelier Advisors, creator of Lean Finance for Startups and author of “Master the Finance Game.”