In this review, we’ll delve into a segment from the Investment Worthy Startup book that dissects the economic aspect of startups using the POEM Framework. This framework is an acronym that stands for the Proposition, Organization, Economics, and Milestones. Let’s uncover the valuable takeaways from the Economics section.
Capital Sources
The Economics segment of the POEM Framework begins by emphasizing the critical role of capital. It emphasizes the importance of both human and financial capital in a startup’s journey. Founders often invest their human capital, accompanied by initial financial support from family, friends, or “Fools” (FFF). Additionally, grants and prizes become valuable sources of early funding. Angel investors play a crucial role by providing both capital and mentorship. As startups evolve, they might seek venture capital, enabling growth and sustainability.
Expenses and Burn Rate
For startups, capital is essential, but expenses are the fuel driving the income engine. This section underlines that expenses encompass a broad spectrum of costs, from employee salaries and office space to market research and inventory procurement. Startups closely monitor their burn rate, the rate at which they spend cash before generating income. It serves as a crucial indicator of a startup’s runway, indicating how long it can sustain operations without running out of funds. Tech startups, in particular, face significant expenses related to app development and design.
Impact and Income
Profitable income at scale remains the ultimate goal for startups. Investors typically prioritize revenue growth over immediate profit, understanding that efficiency gains can later translate into profits. The International Financial Reporting Standards (IFRS) emphasize the importance of the bottom line, highlighting a startup’s net profit after all expenses have been accounted for. Growth is the simplest measure of a product or service’s impact, reflected in customer numbers, revenue, profit, Sustainable Development Goal (SDG) achievements, and more.
Investment Sources and Networking
Diverse capital sources are explored, ranging from personal savings and loans to angel investors, venture capitalists, and crowdfunding. It’s crucial to select investors carefully based on factors like reputation, specialization, and shared values. Building an investor network early can simplify future fundraising efforts.
Reporting to Investors
The book advises startups to establish clear and concise reporting templates, covering vital metrics, burn rate, financial overview, cash reserves, and more. Consistent communication with investors keeps them informed and engaged in the startup’s progress.
The Economics segment of the POEM Framework provides invaluable insights into the financial aspects of startups. It highlights the intricate dance between capital, expenses, income, and impact. Whether you’re a budding entrepreneur or a seasoned founder, understanding these economic principles can significantly enhance your startup journey. Ultimately, startups are about building not only profitable businesses but also making a positive impact on the world.
