The Top 7 Mistakes Founders Make Before $1m ARR

May 14, 2024

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In London’s bustling world of start-ups, reaching the $1m Annual Recurring Revenue (ARR) milestone is like receiving your first badge of honour. However, the journey to this landmark can be filled with hurdles. Drawing on our experience as one of the best accountants in London at Price & Accountants, London’s trusted partner for countless SMEs and tech start-ups, we have seen the common mistakes start-ups make on their way to this milestone. So, let’s delve into these mistakes and explore how to sidestep them.

1. Stepping Back from Sales Too Soon

In the early stages, founders play a pivotal role in sales, mainly because they’re profoundly aligned with the product’s vision. Their enthusiasm often strikes a chord with potential customers. However, many founders, unaware of the benefits of SEIS tax relief and EIS funds, hand over sales responsibilities prematurely. This move can lead to a diluted sales pitch, potentially causing the loss of invaluable founder-customer connections in the start-up’s budding stages.

A prime example is the story of a London-based tech start-up, TechLoom. The founder, Sarah, had a ground-breaking AI tool. Initially, Sarah’s passionate pitches landed significant contracts. But once she handed sales over to a newly hired sales VP, the company saw a 30% drop in successful pitches. The new VP lacked Sarah’s passion and deep understanding of the product.

The Fix: The founder’s touch in sales is invaluable. While it’s crucial to delegate, founders need to remain an integral part of the sales process, especially in the formative stages of the start-up. You can engage with customers, understand their needs, and tweak your product accordingly. And always remember, even if your role in sales evolves, the commitment remains constant.

2. Ignoring the Burn Rate

As excitement builds and the start-up begins to scale, it’s easy for founders to get wrapped up in the growth and neglect financial vigilance. A substantial bank balance, often due to initial funding rounds, can give a false sense of security. But unchecked expenses and an aggressive hiring spree can quickly eat into funds. Before they realise it, the start-up might burn cash at an unsustainable rate, jeopardising future operations and scalability.

GreenTech Innovations, a renewable energy start-up from London, is an example. They raised significantly through EIS funds, but an aggressive expansion strategy nearly depleted them within a year.

The Fix: Keeping a sharp eye on the burn rate is essential. Please look over your expenses regularly and make sure that your business scales in a financially sustainable manner. Consider regular consultations with small business accountants in London like Price & Accountants, who understand the unique needs and pressures of start-ups in London and beyond.

3. Losing the Competitive Edge

Initial successes can sometimes lead to complacency. Preoccupied with internal challenges and maintaining existing business, founders might need to monitor the competition. This oversight can be costly, especially in fast-evolving sectors where new competitors with innovative offerings can emerge overnight. When founders notice, their start-up might have lost significant market share or need to be updated.

EduLearn, an EdTech company in London, developed an online learning platform that gained significant traction. However, as they focused on internal operations, competitors introduced gamified learning experiences. By the time EduLearn caught on, they’d lost much of their market share to competitors who had evolved with the market’s demands.

The Fix: No matter how big or successful you become, always have an ear to the ground. Understand market shifts, be aware of emerging competitors, and never stop innovating. Regular market analysis and customer feedback loops can be invaluable.

4. Imbalance in Team Composition

Building the right team is critical for any start-up. While it’s tempting to bring in seasoned professionals from the outside to infuse expertise, excessively can dilute the company’s original culture and vision. Conversely, relying solely on internal promotions might stifle fresh perspectives and new ideas. Striking the right balance is crucial but often overlooked.

HealthFirst, a healthcare start-up in London, brought in several senior executives from large pharmaceutical companies. While they brought valuable experience, they also unintentionally shifted the company culture from a dynamic start-up vibe to a rigid corporate one. The result was a stifling of innovation and a high turnover rate among original team members.

The Fix: A balanced team, blending the fresh perspectives of new hires with the ingrained experience of long-standing employees, is critical. This harmony ensures the company’s core values remain intact while infusing fresh energy and new ideas.

5. Overlooking Compliance and Regulation

With their attention primarily on product development and growth, founders sometimes need to pay more attention to the regulatory landscape. This oversight can have severe repercussions. Regulatory bodies have little patience for non-compliance, and penalties can be financially and reputationally damaging. Moreover, potential investors or partners often scrutinise regulatory adherence before committing.

SafeData focuses on affordable solutions for SMEs. Still, they overlooked EIS/ SEIS eligibility, which led to significant setbacks. They could have benefited from EIS funds/ SEIS tax relief but missed out due to non-compliance

The Fix: From VAT to payroll, ensure all legal and regulatory requirements are met from day one. Not only does this protect the company from potential legal issues, but it also builds trust with stakeholders.

6. Not Prioritising Product Feedback

Passion for their product can sometimes make founders resistant to change. They might perceive feedback, especially if it’s critical, as a challenge to their vision. However, ignoring feedback, especially from early adopters, can hinder product development and market fit. Founders might end up with a product they believe in that doesn’t resonate with its intended audience.

StyleHub, a fashion-tech start-up in London, developed an app they believed would revolutionise online shopping. However, early users found the interface non-intuitive. Instead of iterating based on this feedback, the founders stuck to their original vision. Six months later, they saw a massive drop in user retention and had to spend considerably on redesign.

The Fix: Early adopters are your product’s beta testers. Their feedback is invaluable. Embrace it, and iterate your product accordingly. After all, a product that resonates with its users is destined for success.

7. Inadequate Financial Planning

While product development and market acquisition are undoubtedly essential, they need to be underpinned by robust financial planning. Many founders, especially those without a financial background, side-line this aspect, assuming that a solid product will naturally attract investment. This neglect can lead to funding crises, missed opportunities, or unfavourable investment terms when they finally seek external funding.

DriveSafe, an app-based platform offering driver training in London, saw rapid initial growth. Believing their growth trajectory would continue, they didn’t focus on a backup financial plan. When the growth plateaued sooner than expected, they struggled to manage operational costs and were forced to accept investment terms that weren’t in their favour, diluting the original stakeholders’ shares.

The Fix: Financial acumen is crucial. Whether understanding tax schemes like SEIS tax relief /EIS funds tax relief or navigating the complexities of seed to Series A funding rounds, in-depth financial planning ensures your start-up remains solid. Collaborate with experts like Price & Accountants, who have a proven track record guiding start-ups through these intricacies.

Final Thoughts

Every founder dreams of scaling their start-up to new heights. However, the pathway to success is often strewn with challenges. By recognising potential pitfalls and proactively addressing them, founders can ensure their journey to $1m ARR is smoother and more rewarding.

In the heart of London, a city renowned for its entrepreneurial spirit, Price & Accountants stands ready to support founders every step of the way. With our in-depth expertise, we’ve guided numerous start-ups past their early challenges, helping them flourish and succeed. Let us be a part of your success story.