By some accounts, nine out of 10 startups fail. With such a low success rate, entrepeneurs are wise to enlist the help of a mentor or expert. Susan Schreter is one such expert. The venture finance educator and author of Start on Purpose: Everything You Need to Know and Do to Startup with Strength helps entrepreneurs and startups around the country ward off inevitable failure. With expertise gleaned from over 20 years of working in venture finance, Schreter knows her stuff and offers insightful advice.
Alvarez: How long have you been working with VCs?
Schreter: I’ve been involved in the venture finance space for over 20 years, working on both debt and equity transactions involving startups all the way up to buyouts and IPOs. This background gives me the expertise to work with entrepreneurs over the lifecycle of business funding needs.
Originally, I worked within funds, helping to make decisions about which companies got funding. Now I am an advisor to seed and early-stage VCs (providing guidance based on my research of why startups fail), as well as entrepreneurs through my workshops, books and articles. I also serve on the board of directors of a few companies.
Venture capital funds are just one sliver of the range of funding solutions that are available to growing companies in America today. As businesses grow, their funding needs change. Different types of debt or equity are required for different types of businesses at different times.
I love diagnosing the best funding solution to match a company’s particular need. Plus, because I have worked in funds, I know what investors care about most when talking through and negotiating funding opportunities.
I can give entrepreneurs an insider’s perspective about what to expect when soliciting not just VCs, but a broader range of lenders, angel investment clubs, private equity funds, etc.
Alvarez: How did you get started working with startups?
Schreter: My work providing guidance to entrepreneurs and small business owners came from a sideline Q&A-format newspaper column that I wrote for a Hearst-owned publication. Before I knew it, my inbox was full of questions from entrepreneurs and business owners all over the country.
I became the “Dear Abby” of business funding. What I learned was there was a need for someone to explain financial concepts in easy-to-understand language. Most letter writers also needed a boost of confidence – someone who encouraged them to speak to lenders and investors and overcome their fear of “finance” (what I call the F-word to entrepreneurs ).
All the math anyone needs to manage a company and secure financing is basic math – addition, subtraction, multiplication and division. Anyone can do it!
Alvarez: Why are you interested in the venture capital/small business sphere?
Schreter: It’s great to have a career that has the power to create meaningful change. When businesses get funding, they start to hire people and they get to innovate new products and services. But most importantly, owners of prosperous businesses tend to earn more and have higher net worths than their salaried counterparts.
As I like to point out, Americans have a far better statistical chance of becoming a millionaire from business ownership than winning the lottery. I love being an integral part of helping entrepreneurs and business owners all over the country exceed their dreams.
Alvarez: Why are so many startups getting it wrong?
Schreter: Business is all about numbers and managing cash in a profitable way. But most startup entrepreneurs and small business owners start a business because they are passionate about baking, writing software code, or something else that is really important to them. Crunching numbers is not ever a part of the dream of business ownership, so they don’t spend much time on it until they are in trouble.
It’s also one reason why entrepreneurs wait too long before they approach investors and lenders for their funding requirements. And their first impression of desperation to lenders and investors is not a good one. It’s why I like to empower entrepreneurs with the knowledge on what they need to do first, second and third, long before they are in trouble and least likely to ever raise cash on the best terms possible from investors and lenders.
Alvarez: What are the main reasons that startups fail?
Schreter: As part of my academic and field research on “why startups fail,” I traveled the country interviewing bankrupt business owners. I asked them about their biggest mistakes and regrets. There are very clear patterns of failure that cross all industries. The same patterns also affect businesses that had angel and venture capital funding, as well as companies that were entirely funded by the entrepreneur.
Companies fail when they are out of cash. It’s why all of my work is to help business owners feel like they can master raising cash when their companies need it. When cash is not on the CEO’s radar screen, the startup is more likely to fail. CEOs can’t delegate this responsibility to anyone else.
There are other patterns and common missteps that cost entrepreneurs precious business building time and cash. Hiring unqualified employees, advisors and professionals also ranks high on my top ten reasons for business failure, especially during the first two years of operations.
Last week I looked through the work of one entrepreneur. Essentially I had to deliver the bad news that everything that the entrepreneur had spent to date on product packaging was a waste because she had hired a designer that had no experience in designing packaging for chain retail stores. The package didn’t have room for the UPC code, company of origin, and other key information. The box was also the wrong size for the product category.
A lot of precious cash was wasted…it didn’t have to be. She hired the first designer the entrepreneur met rather than approach vendor selection with greater precision. Too many mistakes that involved wasted cash can put a company in trouble.
Alvarez: Why do you think that it doesn’t have to be “hard” for a startup?
Schreter: Everyone says that starting a business is “hard,” but that’s because first-time entrepreneurs often take the hardest, most risk-prone road. I like easy. Whenever new business owners can piggy back onto other larger or more established businesses, they reduce the risks of going out of business.
In my book, Start on Purpose, I detail a long list of ways companies can advance without having to incur all the costs of advancement. Starting out on your own shouldn’t mean that you always have to go it alone.
Alvarez: What should a startup do to succeed? How can it “start on purpose”?
Schreter: I hate it when someone says in a flippant way that they are “going for broke” or are “excited to take some risks” as an entrepreneur. Starting a business “on purpose” is all about reducing avoidable risk and guesswork everywhere.
It is this kind of mindset that will keep a new company in business rather than join the one-third of businesses that fail within the first two years of startup. Whenever an entrepreneur has to guess at something, there is too high a risk that the decision is all wrong.
Alvarez: What prompted you to write a book about startup success?
Schreter: My book, Start on Purpose, is not so much about the rather vague notion of “success.” I like to break concepts down into specific, more “purposeful” numbers and then set achievable goals.
For example, for every dollar an entrepreneur invests in their new business, I want that business to grow in value to be worth at least four times that amount. (Otherwise, why bother?) If a business owner invests $20,000 in a business, I want that business to be worth $80,000. When entrepreneurs know how to define success in practical, specific terms they are more likely to reach those goals.
One chapter of Start on Purpose is devoted to teaching first-time entrepreneurs exactly what types of customer relationships and other aspects of their business that tend to increase business value in any industry. All of my tips and strategies come from years of sizing up business value for buyout funds or other transactions.
The guidance is not complicated, but empowering to know. It’s fun when entrepreneurs say to me with pride, “Susan, I get this” or “I can do this!” And they can. Once business owners know exactly what types of initiatives are more likely going to reward them, especially at the time they want to sell their businesses, then they are excited to get to work.
Alvarez: If you could tell startups to do one thing right, what would it be?
Schreter: Watch your cash! Companies go out of business when they run out of cash.
The second thing I tell first-time entrepreneurs is whenever they don’t know how to prioritize their work day, they should favor initiatives that most directly and quickly bring in cash. This means favoring customer-building activities or calling customers that are delinquent on outstanding bills.
I’d much rather have an entrepreneur worry about how to get more business out of a customer than fret about how many people follow a company on Twitter or Facebook. Again, the business owner’s work day becomes more purposeful and fun, because more cash flows into the company’s checking account than out of the checking account.