Diagnosing the struggling startup is the first step to recovery. When you go to the doctor, he or she will not prescribe a solution before a diagnosis. The same with companies—large, small, start-up, or established. After we identify symptoms such as poor cash flow, we must perform a diagnosis.
The Struggling Startup Might Not Need Cash
First, what does struggling mean? The symptom could be insufficient sales, poor quality, inadequate staff, underfunding, and many other permutations. But an important issue often overlooked is this: Does this business have the potential to be viable? Sometimes folks rush into business because they see a market. But that market needs analysis to see how to exploit it. Did you do proper market research? Did you choose an activity that fits your talents and desires but not the market? How much planning did you do before you started?
Second, after diagnosing the issue(s), do a precise and objective evaluation before deciding to change course. This review might lead to closing the business to stop the cash drain. So seek counsel from a trusted, experienced person whom will tell you the truth, not what he or she believes you wish to hear.
Sometimes, carrying out the business strategy can be difficult because finances (a lack thereof) can distract you, and cause you to seek a sub-optimal path. So you need to be patient and wait until you raise adequate needed funds before starting.
The Struggling Startup Needs Focus
I advised a firm confused about its strategic path. An indecision that led to a struggling startup burning much cash. Should it be a niche market player, or try for a larger share of the broad market? The first will produce few customers, high value-added items, and high margins. The second would be a much larger market, lower margins, more customers, less value-added products, more standard products, and likely less profit.
Executives debated the two paths but did not agree on a solution. Meanwhile, the business struggled. I asked them to consider these four questions:
Which markets are you serving today?
Are you serving higher value-added and mass market customers?
Are you delighting your customers today?
What are your core competencies?
They were trying to operate in both markets and did a poor job in each, so they lost money. Customers were unhappy and returned products regularly. The firm had not identified core competencies and thus were not exploiting these strengths. Executives focused on “cutting costs” and “making money” to stop the cash drainage. But this approach is futile. It does not address the underlying issues. Why were customers fleeing? That’s the question that needed answering. Executives did not try to diagnose the business’ condition; they saw the issue as a “cash flow problem,” which it wasn’t.
Diagnose the Problem to get the Solution
After my initial discussion with the owners, they realized they needed to diagnose the situation to find causes of the problems to fix them. They understood their challenge—they were not serving their customers. The business lacked focuss and headed in several directions, resulting in the massive cash drain. It was chasing lucrative markets it could not serve well. Once they found the roots of the problem, they set the firm on a solid foundation and the cash drain stopped.
The firm became a niche player. It is focusing on serving specific customers, and staying alert to market changes. Today, the business is profitable. Executives know they cannot let markets lead their decisions. They must decide the focus of their strategy and the rate of growth. Management understands the need to distinguish good growth from bad growth. And the effects of both!
© 2020 Michel A Bell