Why Tech Startups Should Invest in a Financial Advisor

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The first year of a startup’s life—mainly working in the highly competitive tech industry—is paramount. Tech companies are like sharks. They die if they don’t move. Every decision you make counts in an industry that demands high annual growth rates simply for survival.

Financial advisors exist to help individuals and businesses navigate high-risk financial situations. There for more than just budgeting, they can be a significant lifeline for startup owners who want to set themselves up for success.

In this article, we offer a sweeping overlook what financial advisors do and how you can use them to achieve long-term success for your tech startup.

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Situation

why tech startups should invest in a financial advisor

We know what you are thinking. This is a startup. A financial advisor sounds nice, but we aren’t liquid enough to throw cash at everything we want.

Indeed, finding the money for a financial advisor in your startup’s budget isn’t always easy. They can be expensive, and that’s not always cashing you want to spend when you know you should be working on product development, marketing, branding, etc.

Here’s the deal: tech may be the fastest-growing and most competitive industry. The decisions you make in the first couple of years will determine whether or not you’re still around in ten years.

Financial advisors help ensure you make the right decisions at this crucial moment in your startup’s short life. The score is clean at the moment, but each decision shapes your company’s long-term future.

Financial advisors help you make the right calls now when your decisions have a more significant impact than they ever will.

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What is a Financial Advisor?

In this case, the name is pretty descriptive. Financial advisors are finance experts. They advise their customers on a wide range of matters. In your business’s startup phase, this might mean helping clean up your financial processes and making sensible choices immediately.

As your company matures, a financial advisor might arrive at high-growth moments. Do you want to launch a new product or even buy a competitor? These are excellent times to employ the services of a financial advisor.

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Are Financial Advisors Full-time Employees?

No. Usually, financial advisors run their businesses. They come in as a consultant. You become a client and can use their services as you see fit. Because you aren’t paying them an annual salary, they are much more affordable than many business owners initially assume.

Many financial advisors charge via commission based on how much money they manage.

That still sounds expensive.

Well, sure. They’re financial people. They are not keen on giving their expertise away for nothing. But their pricing structure makes it easier to recuperate the cost of their services based on the value they supply your business.

It’s worth noting that many advisors may charge an hourly rate at the business level. This fee might seem high, but it will be more sustainable than a wealth-management-related commission, which grows based on how much you have.

No matter what, it’s always essential to go in and understand their fee structuring system. A legitimate, professional financial advisor will have no problem answering your questions about their fee structure.

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What is the Difference Between a Financial Advisor and a Financial Planner?

“Financial advisor” and “financial planner” are often used interchangeably. However, in the world of professional finance, they are distinct. Individuals who want to improve their money management skills usually use a financial planner.

The planner might come in, evaluate their income, and help them establish a budget that aligns with their long-term goals. For example, if you want to know how much you should be squirreling away each month for retirement, a planner will be your go-to person.

Advisors are there to help you decide what to do with your money. This can include budgeting, but the scope of their work is usually more significant. Financial advisors are there to help people negotiate bigger financial moves. Investments. Growth strategies. Etc.

To that end, businesses and individuals may employ multiple financial professionals’ services to ensure all their bases are covered. Big businesses have entire finance departments that help to advise them and ensure their moves are sound.

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Are There Different Kinds of Advisors?

Yes, there are undoubtedly different kinds of financial advisors.

  • Investment advisors: As the name suggests, investment advisors help to advise people on their investments. This is an SEC-regulated job that often involves managing enormous sums of money.
  • Brokers: Brokers buy and sell stocks and bonds on behalf of their clients. This job is also regulated by the SEC. Different types of brokerage licenses determine what sort of stocks and bonds the broker can work with.
  • Asset managers: Asset managers work to help their customers make the most of their assets to maximize their potential to grow their wealth.
  • Personal bankers: Personal bankers usually work on behalf of very wealthy clients. This all-purpose position can involve everything from handling taxes to advising on charitable giving and investment opportunities.

For startups to decide what type of advisor they need, they should consider their long-term goals. It may be possible that multiple professionals will be necessary to get you where you are trying to go.

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Financial Advisors Will Help You Save Money

While financial advisors might command a salary that startup business owners would describe as “impressive” and “much higher than we want to pay,” one of their hallmarks is saving clients money.

If they didn’t, their job wouldn’t exist. Not only will your financial advisor make recommendations designed to improve your company’s strength, but they will also optimize your internal financial processes.

They will essentially “teach” your business how to understand its income and losses to be better prepared to make good long-term financial decisions. This is a crucial benefit of expertise that startups don’t get without a financial expert.

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They are Great for When it Comes Time to Make Big Moves.

Ok. So you survived the dreaded first year as a tech startup. You feel pretty good. There are no sure things in business, but you are sitting pretty with a product people like and a team that knows how to get it out in front of the right people.

Your sales, marketing, and customer service branches may generate revenue and help you implement your growth strategy. Still, financial advisors will help you determine how to fund that strategy.

In business, the right move at the wrong time can still be a disaster. Your financial advisor can help you time your moves for optimal success.

Let’s say you want to launch a new tier to your core product—a premium version with features that will attract enterprise customers.

You’re excited. This move should lead to a new chapter for your business. And the product itself is every bit the result of data processing. You’ve surveyed your customers and distilled their input into this product. You’re confident it will work.

You’re less confident when it will work. Product development costs time and money. While you pump resources into this new product, your business may be vulnerable to market fluctuations.

Recessions. Big moves by competitors, and so on.

It’s a risk, but one that your financial advisors may be able to help you negotiate. They can look at your financial data and help inform your growth strategy by analyzing when your company will be strong enough to negotiate the risks.

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You’ll Want Them When Times are Tough

Recessions happen about every three years or so. It’s nothing new. Market fluctuations have existed for as long as markets themselves have. But when you are a business, a dip here or there can feel like an existential threat.

When the next recession comes, a financial advisor may make a massive difference in how your startup handles things.

Ok. But if there is about to be an economic downturn, shouldn’t we be focused on saving money?

You’re talking about cutting expenses. Like maybe reconsidering how much you pay your financial advisor?

Among other things, yeah.

This again, huh? Your financial advisor’s fees may indeed feel particularly unwelcome when you are trying to trim the fat. However, this is one expense you won’t want to cut. Successfully navigating a recession requires an expert hand at the wheel. You’ll want every ounce of help you can get.

Mainly because an economic downturn doesn’t spare you from the “grow or die” mentality of the tech industry. Even during times, successful tech companies still report an average growth rate of around 20% (which is about where most businesses in other industries are during the best times).

The rewards are high in tech, but so are the stakes. That doesn’t go away just because of a recession. If your business survives long-term, you must thrive in even the sparsest conditions, like a desert plant. A financial advisor can help you accomplish this.

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The Tech Economy is Just Different

It’s also worth pointing out that tech operates differently than many other businesses. Since the early 2000s, most tech companies have offered their products as subscription services.

Customers essentially rent their digital products instead of owning them outright.

It’s suitable for the customer because:

  • They pay a little upfront cost: Whereas they might have previously spent one thousand dollars on buying a software solution, they now get the same for a (usually) small monthly fee. This makes it easier for them to afford a giant tech stack. It also makes them more open to experimenting with new tools.
  • They get free updates: Because they are only renting the product, they also get free updates. Whereas before, they may need to replace their product every few years to keep up with the latest and greatest, now their updates come in automatically at no additional cost.

For the business, it means:

Recurring revenue: Knowing how much money you will have each month is excellent. Recurring revenue establishes a consistent cash flow, making planning your future more accessible.

Broader customer base: Because the subscription economy makes your product more affordable, many more people are eligible for it.

Even with its advantages, navigating the subscription economy can be an unfamiliar and sometimes treacherous terrain for new business owners. A financial advisor can help by making informed recommendations on what direction to take your business.

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Conclusion

Almost 90% of tech startups fail within the first year. Of those that remain, another 70% will bite the dust by the end of year two. Business ownership is always challenging, but in tech, things move fast, and the competition is relentless. Thousands of failed businesses pile at the feet of every billion-dollar overnight success story.

Does that mean that it’s not worth trying? Of course not. It means that success is more than just having a good product. Making the right calls when you open your doors would be best. Every decision bears significant weight in an environment that is this high stakes.

A financial advisor won’t guarantee success, but they can help mitigate some risks, taking uncertainty out of your financial decisions.

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