SMBs Avoid the Pitfalls of Financial Mismanagement with Digital Banking Options

By Mike Butler, Grasshopper Bank CEO

This is one of the reasons the innovation economy is abandoning the establishment in favor of digital banks.

Venture capitalists can’t quite give the innovation economy a blank cheque, but they try. In 2021, global venture capital funding totaled $621 billion, up a staggering 111% from 2020 and shattering all other previous records. U.S. investment accounted for about half of that figure at $311 billion, a 106% year-over-year increase, with start-ups capturing more than half of investment activity.

Obviously, raising capital isn’t a problem, but if funding isn’t the problem, why do two-thirds of start-ups fail? Turning a startup into a top company or unicorn takes more than one or two successful funding rounds. Managing that capital after fundraising is actually one of the biggest challenges for start-ups and other small businesses. In separate surveys of GOAL and CB Insightspoor cash flow management is believed to be the number one reason start-ups fail.

Legacy banks, however, are ill-equipped to respond to the distinct business dynamics of a start-up, which, unlike a stabilized business, has a scalable business model and rapid growth that occurs as the business scales and capture market share. Standard banking practices are simply not nimble enough to meet these needs. But, with record venture capital investments and mounting challenges, such as inflationary pressures, stock market volatility, and a destabilized economy, a progressive banking partner has become critical to the financial well-being of start-ups — and more. often, digital banks prove best suited to fulfill this role.

The 2021 start-up cash flow investigation from Intuit best illustrates the disconnect between traditional banking and cash flow management. While nearly 90% of start-ups have a dedicated business bank account, 69% of businesses have experienced cash flow issues to the point of disrupting business operations, and 34% of businesses don’t use any tools to manage their money. It’s a problem. Startups need easy access to fund management data, including real-time cash metrics, transaction logs, and accurate investment options; tools that manage expenses, such as ACH and BillPay payments; and forecasting tools, all of which provide insight into a company’s business fundamentals and financial health. These tools should be standard for startup operations – and for digital banking users, they are.

It’s no surprise to see start-ups embracing digital banking. Three-quarters of Americans already use digital banking for personal financial management, and digital banks have an inherent synergy with start-ups. Innovative concepts are already leveraging technology and data as part of standard business operations, and it makes sense to use these financial management tools to reap the same major benefit: efficiency. That’s the magic word when running a business. With a digital banking partner, tedious and time-consuming traditional banking tasks are replaced with convenience: the ability to access and manage accounts from anywhere; conduct online transactions; automatic bill payment and deposits; and hosting for multiple authorized users.

Crunchbase Experts expect another strong global venture capital funding environment this year, and the right banking partner will not only keep pace with this growth, but also provide stability during times of economic upheaval – invaluable as businesses continue to navigate the post-pandemic uncertainty – while continuing to support strategic growth. This is because, perhaps most importantly, you shouldn’t be alone. The right digital bank should be a partner in the business with experts who understand unique business dynamics and can provide actionable insights on how to manage funds and build custom solutions.

In Why Startups Fail: A New Roadmap for Entrepreneurial Successthe deliveredTom Eisenmann, author and professor at Harvard Business School, said: “Issues with a wide range of stakeholders, including employees, strategic partners and investors, not just founders, can all contribute to the downfall. from a company. But the right strategic partners can also contribute to the success of a business.

In the end, smart money will prevail. When the music stops, the VCs are sated, and the money stops flowing, startups with strong financial management and a quality banking partner will be in the best position to succeed.