Nowadays it has become so common to raise massive rounds that most of us tune out of fundraising together. Over the past four years the fundraising environment has changed so dramatically that it is incomprehensible for those who have lived through it.
Also Read: To Mentor Fledgling Startups
A lot has been made of how the late stage rounds have become ridiculous. Bill Gurley has penned one of the best pieces I have read on this subject. They would go through less diligence and scrutiny to raise late stage rounds of start ups if they had decided to go public. Therefore, we see a lot of late stage start ups which lack operational discipline necessary to go public. Trend trickles all the way down to the earliest stages of venture backed companies and starts there. Practically earlier CEO’s were taught to not put a financial model in any of their fundraising decks.
Every CEO should fully understand the cost of doing business before deciding to increase or raise any outside capital. A start up person wouldn’t want to get the burn rate ridiculous in the starting days itself. Forcing yourself for putting something basic together out of your comfort zone can resist this situation.
Here are few of the tips for people who are starting business ventures and are in their early stages. There is no one stop solution for this problem that fits all. Thinking about customizing this in the context of your start up should be your next venture.
A good example is of how some companies want to get more granular about sales expenses to see if it makes sense to build an enterprise sales team. In order to analyze the costs you spend you will need to add an addendum and a lot of details on the quotas like individual salespeople, ramp time, seasonality and numerous other factors at this.
Including all your daily expenses however, small can also work out. These little things add up which will make you realize that you are spending way more on services than you should especially on things you don’t use. Writing down all these expenses will make you realize how big a hole you are burning in your wallet. Writing all such small things down can save you many dollars. You need to be frugal to be disciplined in the early days. Unaccounted expenses may kill your business start up faster than a ray.
Eventually you should take time for building a marketing funnel. As the business venture matures, the marketing tab should be more specific and based on a real life cost. For example, if you know that it costs you $400 to acquire a customer, and you know what your conversion rate by channel is (Facebook, Google, email, etc.), you should add an addendum to this that gets specific about which channels you intend to spend on.
Generally at the growth stages, sophisticated companies might get fancy with exactly how many leads they are purchasing with their funding and how many will convert to sales-qualified leads which will eventually turn into paying customers. This helps companies understand how quickly they can grow in the context of their funding.
Spending more on vendors than you have to will substantially get people in recruiting expenses. The market has become competitive for talent right now, and you may think that you can do it all by yourself but the reality would be something like recruiting a contingency at some point in your life. Hiring engineers can take risk out of this type of expense because you only pay if the employee works for a long period. “Fringe” is much higher than you think in hiring a full time employee.
Office space prices are increasing which is the reason that companies have to raise so much to pay off their leases. It is rare to find a property that will take you in these days for lease terms of less than three years. Every early-stage entrepreneur should use this or something like this when considering how much to raise.