Why Startups Run Out of Money

You've heard it repeated over and over:

"90% of startups fail because they run out of cash."

"So in order to succeed, I just need to not run out of cash. Got it," you say. That's usually where it stops.

But the bigger (better?) question is: what should you spend your cash on in the first place?

A lot of the pre-funded startups I mentor at 1776 have similar challenges. They launch their product, then immediately start dumping money into marketing. In their investor pitch deck, what do they want to spend the raise on? Marketing. This decision is the result of impatience, not solid reasoning. It's rooted in the "build it and they will come" mindset, where launching is the finish line, and scaling needs to happen yesterday.

"I got the product out, now let's tell as many people as possible > about it!"

The reality is that marketing should only come when everything else in the company is healthy. Marketing is going to be your company's biggest expense (outside of salaries). It takes the longest to test. It takes the longest to generate an ROI. It's also the most difficult to attribute ROI to. When you talk to marketers, you'll hear them say "this will take some time to get right." But when you're starting a company, what do you have the least of? Time. So why, when you're the most vulnerable, would you invest all your resources into something that takes the most time to test, track, and tune?

When starting Localist, we looked at growth from the other side of the coin: sales. If marketing is all about generating inbound interest at scale, sales is about generating interest through outbound efforts. Sales doesn't scale, but it's a fantastic way to test messaging.

We spent years banging our heads against the wall trying to force marketing to work based on intuition. All the while, our sales team was quietly killing it, gathering reality-based intelligence. We smartened up, created a cohesive relationship between sales and marketing, and landed on a message and value that resonated with our customers.

If you have the means, hire a person fresh out of college with a competitive spirit who isn't afraid to ask hard questions. Have them do research calls, selling nothing, just asking questions. The data you get from these conversations will inform just about every other business area of your company. Because it's not a sales call, the folks on the other end of the line will let their guard down, and share their deepest fears and biggest hopes. You can use the result of these conversations to craft your pitch, hone your marketing message and build a product that solves real needs.

a) Pay someone to have conversations with customers all day every day for two months, logging the details of those conversations in a CRM, giving you the ability to drive product, marketing, hiring and strategy decisions.

OR

b) Buy Google Ads that generate a 0.5% click-through rate, with <1% of those ultimately converting to a trialer, and <1% of trialers converting to a customer (these are realistic numbers if you don't know what your message should be).

the message, it's very exciting to be on the business end of a firehose. But until you've nailed what you need to say, you're simply throwing good money after bad.

NOTE: This was written through the lens of a B2B SaaS company. B2C startups are just as tricky (if not more) to scale, and a sales person would likely be underutilized. A digital marketer who knows how to test and optimize would be a better first-hire here, but let's be honest, if you're a B2C looking at any kind of growth, you should probably have a couple million of venture capital in the bank first.