What are some common mistakes in financials for first time founders?

On pricing and unit economics:

  • They undervalue their offerings and charge too little - leaving money on the table.
  • They don't hack their unit economics - losing money in every sale (this is fine in the short term but very not fine in the long term.)
  • They don't think about lifetime value (LTV) properly and don't think about how to extract the most money from each acquired customer.
  • They underestimate the cost of customer acquisition (COCA), resulting in a poor lifetime value to cost of customer acquisition ratio over time (LTV/COCA) which usually starts high, but MUST come down to at least a 3:1 ratio over time.

On forecasting:

  • In forecasting revenue, they overestimate the speed at which they will acquire customers
  • In forecasting revenue, they overestimate the number of years customers will stay with them In recurring revenue models ("Our customers will stay with us for the remainder of their lives")
On costs / operating plan:
  • When calculating costs, especially for hardware companies, they are usually 10x to 100x off on what they think it takes to bring something to market.
  • They tend to be grossly unrealistic in timelines for (a) product dev esp for hw companies (b) go to market ramp time esp for sw companies
  • They usually have no idea what organization structure is needed / biz partnerships to pursue to get the job done consequently cost structure is artificially favorable

The best way to manage around these common mistakes is to go over financial projections with a seasoned, trusted advisor who has built financial scoreboards for startups of the same type before.  A little feedback early on can go a long way to helping founders come up with a strategy that works.

 

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