How to Spend the Money Your Startup Raises

 Startup

 Many entrepreneurs would not know what to do with money if they caught it, much like a dog chasing a car. 

In all honesty, I would never try to instruct a founder of a startup on how to invest their funds. You put in all the effort, so use your capital however you see fit. However, I am aware that many more startups are attempting and failing for every one that receives funding. 

I am also aware that the lack of a clear plan for the money once it has been deposited is one of the most common reasons investors reject these founders.

Those are the folks I want to talk to

Best Funding Strategies Apply the Four Ts.

I'm not here to give you reasons for why you should raise money, either. I gave you a check list to help you find the answer to that question a few weeks ago. 

But it's more crucial than ever to be precise and explicit about how that money will be used to fuel your business growth if you're starting a fundraising cycle or even just thinking about it.

A roughly equal number of venture-funded and revenue/self-funded firms have gone through and been advised by me; in fact, I'm now working on one of both. 

Based on my personal experience and the confirmation of my VC and angel investor friends, this is a pretty straightforward method for establishing expectations for how a venture investment would be used.

1. Time: How Much Runway Will You Add?

The first and most crucial metric for determining the worth of every new investment is this one. It's the number that, at any time, you ought to be able to recite off the top of your head. 

How long can you keep the doors open?

Simple enough: each month, until the investment equals zero, calculate cash on hand + expected revenue minus burn rate. The ideal shape of this curve is one that begins to decline sharply as soon as the fresh funds are put to use, flattens out while results are being produced, and then ascends sharply as the business starts to realize returns.

I've learned from experience to consider the best-case, worst-case, and most-likely scenarios. Outside of the company, discuss the worst and most plausible scenarios. Set everyone's internal objectives to meet the best case scenario as if it were the only scenario.

2. Talent: How Much Experience Will You Bring on Board?

The first place fresh money is allocated in practically every fundraising cycle I've been through is to the talent budget. I mean, I wouldn't even require outside financing if I could accomplish my objectives with the team I now have. No other area will yield a better return on investment than hiring more and better staff, which helps you achieve higher goals more quickly.

The three categories of talent that additional funding often supports are as follows: 

The talent in the first bucket is what you need to immediately increase output and cover skill shortages in the company's skill set. 

The second bucket has the skills you need to raise resources for sales, marketing, operations, and support in order to take advantage of the first bucket's enhanced production.

Adding resources to finance, HR, and customer success and care, as well as doubling down on resources to support the first bucket in their work so the cycle can continue, is what you'll need for the third bucket if and when all goes smoothly.

3. Tech: How Much Growth Will You Automate and Scale?

Today, whether a new firm is tech-centric or not, technology is an essential part of that business. The X-factor in determining how much of an outsized return you get on your new talent will be buying or constructing new technologies. For any startup, there are typically three stages of new technology spending:

Catch ip: All of the company's technological stacks, including the ones for operations, communications, support, and sales/marketing, need to be brought up to levels that are competitive with those of the industry.

Cleaning up: There are probably also operational and technical debts, administrative gaps, and a minefield of sporadic inefficiencies and human fixes. Many of these problems can be resolved with new technology and more time spent online. 

Innovate: The majority of young entrepreneurs, particularly those in technology, have a tendency to devote 100% of their tech budget on innovation. Pro tip: It should be closer to 60/40, with the remaining funds designated to make up lost time and complete cleanup tasks, even those outside the purview of the IT team. 

4. Traction: How Much Market Share Will You Win?

While difficult to master, this one must be done correctly. Now that they have board seats, the investors will use this as a gauge of your success and nag you about it during all of the board sessions.

Keep your market share predictions modest enough to avoid missing. A public company's stock may decline if its results come in somewhat below expectations. All hell breaks loose in the board meeting if a private startup misses projections by a significant enough margin or for a lengthy period of time. 

There are a plethora of outside variables and situations that are not our responsibility that could result in that miss. In a market that is prone to skepticism and volatility, be sure to account for these surprises.