5 Biggest Ways Startups Waste Money (and What to Do Instead) As a startup, your biggest resources are time and money. Here's how to avoid wasting both so you can build a better business faster.
By Kenneth Burke Edited by Chelsea Brown
Key Takeaways
- The five biggest money mistakes young startups make and how to avoid them
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Startups are notoriously strapped for cash, but even if yours is well-funded, you need to be a good steward of your resources. However well-intentioned, these are the biggest mistakes I've seen young startups make with their precious dollars.
Don't worry, though, I'll show you what you can do instead to accomplish the same goals without wasting money.
1. Contracting a fancy branding agency
You want your startup to look great, stand out from the competition and feel like it's an established player even though it's brand new. That's reasonable, but there are three problems:
You and your customers don't know what your company is yet
Who you serve and how will change drastically within the first few years
Your #1 priority as a startup is finding product-market fit
Dropping 10, 20 or $30,000 on an agency to create your brand identity and messaging is a waste. Even if they do a good job, you'll need to go back to the drawing board within two years. Instead, ask your customers to explain the value you bring them, and use their descriptions for your messaging. Find a young designer or go through a site like UpWork to create your logo and brand guidelines. You can do all of this for under $1,000.
Related: 7 Free Steps to Market Your Bootstrapped Startup
2. Sponsoring events and trade shows
You want to make a splash in your market, and you want to go where your target customers are. Events, conferences and trade shows may seem like a good fit, but you shouldn't sponsor them. Not yet. First, you need to prove three things:
That you have product-market fit with this audience
That you can convert new prospects into paying customers systematically
That you can acquire these new customers profitably
Exhibiting at a small trade show will cost you a few thousand dollars. Sponsoring "the big show" in your industry can cost upwards of $100,000. Either way, what you should do at this stage is attend the event, but not sponsor. As an attendee, you can still talk to all of the same people, and it's a tiny fraction of the cost. This also helps you experiment, because usually, you're going to an event for the first time and don't know yet if it's actually worth the money.
Go as an attendee first. If you can source customers and create a good return, then look to sponsor it next year.
3. Hiring for scale too soon
Startups will commonly say, "Okay, we've got a product our target audience is willing to pay for, let's scale." But there are so many things to figure out first.
Retention: Will those customers stick with you and keep paying?
Onboarding: Will new hires be able to do as much as you at the same or higher quality?
Channel-market fit: Can you systematically acquire customers through one or more channels?
Unit economics: Will you make money on each new sale?
Instead of hiring after initial traction, build a process to prove that you can systematically and profitably acquire new customers who stick with you. Then hire one key employee who can run that process for a particular department, and prove that you can still systematically and profitably acquire customers. Then look to expand slowly and consistently. Don't jump too soon.
Related: 5 Steps Every 1-Person Sales and Marketing Team Should Follow
4. Advertising without a high-converting website
Ads of all sorts can be valuable for getting your core buyer's attention and driving them to your website, and startups do this all the time. Usually, they lose money. What's the problem? Typically, the problem is one or more of the following:
The messaging doesn't resonate — viewers can't tell what you do
You don't answer the questions viewers have
Viewers can't see or get a feel for the product
It's not clear how viewers can take the next step to buy if they want to
These are relatively simple things to fix, but you have to fix them. Otherwise, you're left with a leaky funnel, and all you get when you pour more leads into a leaky funnel is a larger leak.
Once you've ensured your core audience can come to your website and buy easily, then consider spending money on ads to increase relevant traffic. Anything spent before that will be a waste.
5. Pricing too low
Revenue you miss out on is effectively the same as money wasted, and it's a problem that affects almost every startup. The reason is simple: You've created something new, and you don't know what to charge for it, so you lowball your value in order to make sure people aren't dissuaded by the price. It's reasonable, but you're leaving a ton of money on the table. Instead:
Ask potential customers what they would expect to pay for a product or service like this
Check competitors' pricing and packaging, and price yours similarly
Do some basic research to see how much your tool would make or save someone, and price it at 1/10 of that
Over time, you'll learn more and more from your customers and the market to help refine your pricing and packaging. You should also consider spending money to conduct market research to see what people are willing to pay for your offer (once you have that kind of money to use).
As a final recommendation, be quick to talk to your customers and slow to spend money. This combo leads to better decision-making for startups and helps you make more while spending less.
Related: 7 Paid Marketing Steps to Fuel Your Startup's Growth
