In this article adapted from the platform Inc. by Joe Procopio, founder of TEACHINGSTARTUP.COM, the author doesn’t try to talk to entrepreneurial leaders about channels to spend money in startups, they’ve already done the hard work, knowing better than anyone how to invest their capital in the ways they see fit. However, the purpose of this article is to shed light on the road that hundreds of individuals are still searching for at the outset of their startup journey: for every startup that receives funding, there are many that attempt and fail.
“I also know that one of the most frequent reasons investors reject these founders is the lack of a coherent plan for the money once it’s banked. Those are the folks I want to talk to.” Joe wrote.
Joe advises in his article: “If you’re going to start a fundraising cycle, or even if you’re just thinking about it, it’s more important than ever to be clear and concise about how that money will be applied to fuel your business growth.”
In this regard, the author wrote: “Here’s a very simple way to set the expectations for how a venture investment will be spent, based on my own experience and verified by my VC and angel investor friends”, where Joe proposed four key points in his article, which are outlined below.
1. Time: How Much Runway Will You Add?
This is the first and most important metric for measuring the value of any new investment. It’s the number you should be able to rattle off from the top of your head at any given moment.
How long can you keep the doors open?
The formula is easy enough: Cash on hand plus expected revenue minus burn rate, calculated every month until the investment goes to zero.
Ideally, this is a curve that starts to descend sharply once you put the new money to work, flattens out while that work produces results, then ascends sharply on the back end as those results generate returns for the business.
“Experience has taught me to have a best-case scenario, a worst-case scenario, and a most-likely scenario. Share the most-likely and worst cases outside of the company. Internally, set everyone’s goals to hit the best case, as if it were the only case.” Joe added.
2. Talent: How Much Experience Will You Bring on Board?
In all of Joe’s fundraising cycles, talent recruitment is the first aspect for which new funds are allocated, which he talked about: “if I could hit my goals with the team I have, I wouldn’t need outside investment at all. More and better talent gets you to loftier goals more quickly, and no other area will provide a better return on spend.”
There are usually three buckets of talent that new money will accommodate:
The first bucket: is the talent you need right now to fill gaps in the company skill set and immediately accelerate output.
The second bucket: is the talent you need to capitalize on the increased output of the first bucket — adding resources to sales, marketing, operations, and support.
The third bucket is: the talent you need if and when everything goes right — adding resources to finance, HR, and customer success and care, as well as doubling down on resources to help the first bucket do their job so the cycle can continue.
3. Tech: How Much Growth Will You Automate and Scale?
Technology is a critical component of any new business, whether or not that business is tech-centric. Buying or building new technology is going to be the X-factor in determining how much of an outsize return you get on your new talent. There are usually three stages of new tech spend for any startup:
Catch up: The company tech stack, operations stack, communications stack, support stack, and sales/marketing stack all need to be brought up to competitive technology levels.
Clean up: There is also likely technical debt, operational debt, administrative holes, and just a minefield of random inefficiencies and manual solutions. New technology and more tech time spent can clean up a lot of these issues.
Innovate: Most new founders, especially tech founders, tend to allocate 100 percent of their tech spend to innovation. Pro-tip:It should be more like 60/40, with the remaining budget allocated to catch up and clean up, including in areas outside of the technology team.
4. Traction: How Much Market Share Will You Win?
This one is tricky to nail down but critical to get right. This is what the investors are going to measure your progress on and nag you about in all of those board meetings now that they have board seats.
Stay conservative enough in your market share projections so that you don’t miss. If a public company misses earnings estimates by a few percentage points, the stock can plummet. If a private startup misses projections by a large enough gap or for an extended period of time, all hell breaks loose in the board meeting.
There is also any number of external factors and not-our-fault scenarios that can cause that miss. Make sure you leave room for these surprises in an always skeptical and fickle market.
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Last Updated on November 23, 2022 by Safiya K
