Remember the time when startups were evaluated primarily based on their innovative ideas and explosive growth potential? Well, things are changing. Today, more than ever, the mantra "cash is king" has become the most repeated phrase among investors and entrepreneurs.
Let's better understand this paradigm shift and how the lack of cash management has become the third "companion of failure."
1. The Math of 40
Imagine a startup growing at an impressive rate of 60% per year. That sounds impressive, right? Now, if that growth comes alongside a negative EBITDA (earnings before interest, taxes, depreciation and amortization) of -20% for the year, the math reveals a truth: that company may be at the edge of its viability. The sum of annual growth (60%) and the EBITDA result (-20%) equals 40, and that is the threshold value considered by some investors when analyzing startup numbers. This means that a startup with 20% growth and 20% EBITDA is also at its limit for investors who use this metric. The sum of these indicators (growth and EBITDA) must be above 40, so a company with 30% annual growth and 30% EBITDA (a result of 60) is a business that attracts far more investors than the scenarios mentioned above.
2. Cash First
The old motto "money follows the great idea" is being replaced by "money follows solid financial management". Investors are no longer willing to fund businesses that burn money without a clear plan for how they will become profitable. Your startup's cash is the safety cushion that ensures its survival, especially in turbulent times.
3. Disregarding Cash Management Is a Fatal Mistake
The third "companion of failure" is the disregard for cash management in favor of growth at any cost. There is no doubt that growth is important, but it needs to be sustainable. Unchecked cash burn without a solid strategic plan is a red flag for investors and a direct route to failure.
4. Commitment to Sustainable Growth
Today, startups need to embrace financial management with the same passion they embrace their innovative ideas. It is crucial to maintain a balance between growth and effective cash management. Explosive growth should not come at the expense of a financially unhealthy company. Having the support of a robust finance function, or even having partners with a financial and administrative profile, is something extremely valuable and something every startup should pursue.
Article also published on LinkedIn.
