Three Mistakes Tech Companies Commonly Make

We’ve all heard stories about the humble beginnings of many tech startups – a garage workshop with two sawhorses and a plank for a desk, working odd hours around a “day job” that pays the bills until success hits. Such a makeshift existence is common when you’re first starting out and don’t have many financial resources.

But as you grow and succeed, these circumstances will change. And you might be surprised at how easily you can fall into the traps that plague many tech companies along the way. Here are a few that we see regularly and how you can avoid them.

Poor cash management. If you have a good product or service, you’ll eventually sell it and make money or you’ll find an investor who funds your company’s work. Either way, you could face a sudden influx of cash. When you’ve spent years working frugally, that new spending power might tempt you to splurge on high-end office space or other perks that, while well intentioned, don’t necessarily pay off.

It’s crucial to have a growth plan in place before this influx of cash happens. Project what you’ll need in the future regarding equipment, facilities, additional employees, etc. and set a budget for it now. When that cash comes in, stick to your plan and spend it on what you need for smart growth.

Once you have a steady income source, put some away for emergencies. This is especially important if you rely on a few small contracts for the bulk of your revenues; if a primary client goes elsewhere, that income stream will dry up quickly and you’ll need cash to make up the difference. It takes time to raise capital for a business, so pad your savings while you can.

It’s also good to have an accounting professional help you understand your assets, expenditures, profit margins and other financial aspects of your company. The more you know about basic accounting principles to run a business, the better you can manage your cash on hand. He or she can also help you create a cash flow projection – a prediction of your company’s future liquidity over a specific timeframe. A cash flow projection details the categories for projected expenditures, demonstrating to loan officers or potential investors how their money might be spent down the road. If this projection demonstrates a healthy cash flow in the future, it can also indicate whether the company is more likely to pay back loans.

Not understanding investors’ expectations. Even when your company is doing well, you might need more resources to take it to the next level. This is where investors often come into play, giving you some much-needed funding in exchange for a stake in your business (percentage of ownership or profits, for example). However, it’s important to know exactly what an investor is looking for; some want a quick return, while others hope to have a hand in long-term success. If you don’t communicate with him or her, there could be disappointment on both ends of the deal.

To help ensure that your company and an investor are a good fit for each other, ask him or her questions before discussing an offer. For example:

  • Have you ever invested in a startup before?
  • What is the amount you typically invest, and what do you normally expect in return?
  • How do you decide whether to invest in a company?
  • How does my business fit within your portfolio? Do you have a particular niche or interest that my company fills?
  • How quickly are you looking for a return on your investment?
  • How often do you expect updates, and in what form?

When this vetting is done and you’re comfortable with the answers, be ready and willing to share all of your key financial information. Once the deal is complete, communicate regularly via phone calls, reports, newsletters, whatever methods you both prefer to keep your investor informed about your growth.

Neglecting communication and networking skills. Having good people skills is necessary to interact with customers, hire and manage an effective team, get to know investors or build your professional network. Effective, positive communication involves verbal skills and nonverbal cues, so focus on both of these areas.

If you get tongue-tied when people ask about your company, develop an “elevator pitch” – a concise, accurate description of what you do. Keep it to just one or two sentences; it doesn’t have to include every detail of your mission, just a general statement. Memorize and practice it in the mirror or work with a trusted friend. You can also do this for other conversation topics, from basic greetings to in-depth business discussions. While you’re practicing, pay attention to your nonverbal cues – make eye contact, use a relaxed smile, keep an even speed and tone of your voice so that your words are understood, etc.

Once you have those skills down, put them to good use by reaching out to people in your field. A professional network provides an invaluable resource for new insight, market opportunities or even new sources of capital. Find events where you can meet fellow tech leaders, potential investors and others who can help your business grow. Follow these people on relevant social media outlets like LinkedIn, and read any publications they might have. If what they say is of particular interest to you, contact them directly and ask if you can meet them for coffee or lunch to discuss ideas.

Finally, using positive words is a subtle way of maintaining goodwill. For example, let’s say you are speaking with an employee who did well on one project but not another. Which of these sentences would more positively convey your message while still remaining effective?

“I like what you did on Project A, but I’d like to see more improvement on Project B.”
“I like what you did on Project A, and I’d like to see more improvement on Project B.”

In the first example, the but immediately negated the fact that you liked what your employee did on Project A. Replacing but with and reduces that emphasis so that the accolade isn’t overshadowed, yet it effectively gets the message across that improvement needs to be made. Retaining good talent is a key part of a company’s success, so it’s important to maintain a balance of encouragement and constructive feedback when discussing their work.

As your company experiences more success, avoiding these common missteps can help ensure long-term growth that stands the test of time.

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