After successfully bootstrapping your business to get it off the ground, securing venture capital funding can help propel it to the next level. But there are pitfalls to avoid. With more money to spend, it may be tempting to throw money at every new opportunity or problem. However, when it comes to VC money, it’s better not to lose those frugal, bootstrapping ways. Investors not only expect their money back, but also will want multiple returns on their investments. The bottom line: you need to find ways to grow that money, not just spend it.
“Raising capital can be like winning the lottery,” notes Mike Blake, co-founder and president of Atlanta-based StartupLounge.com, a nonprofit and podcast that aims to help startups and early stage companies connect with investors in Georgia and the Southeast. “Once word gets out, suddenly you’re given lots of opportunities to spend it,” explains Blake. “That money should only be used to advance your company’s mission.”
Four years ago, when Kevin Reeth and Ben Curren founded Outright.com, a cloud-based financial management system, they were looking for a way to organize and track financial data in one place. Reeth, former CEO of the Mountain View, California-based company, notes that the firm had already built the product, completed their first partnership with an online invoicing company, and had about 600 customers signed up by the time they secured their first round of funding in late 2008.
“The first thing we did was look to hire people,” notes Reeth. Because there’s a lot of competition for software engineers in Silicon Valley, he and Curren initially found it challenging to find the right talent for the right price. Their investors helped them work through those tough decisions. “We knew this was going to be a race and we’d need an early lead,” notes Reeth. “The focus was less on stretching VC dollars and making them last and more on about making sure we spent the money we planned to spend, but spent it wisely.”
Blake of StartupLounge sees bad hiring as one of the more costly decisions young businesses make once they’re flush with VC cash. “Startups often overpay for an experienced sales people, only to find out that person takes too long to ramp up or cannot adapt to the culture, having come from a large organizations with more support.” Blake recommends starting with a founding team that has a diversity of complementary skills. “Many hands can turn a heavy job into a light one for all involved,” says Blake.
Expect Investor involvement
While you’ll have a lot more money after receiving VC funding, you will also have to answer to more people. “You need to understand investor expectations up front,” cautions Reeth. “Your business is now part of their portfolio, and there will be times when investor needs may conflict with your own.” Reeth and Curren, who both worked for years at Intuit, launched Outright later in their careers and knew what to expect. “You may not always see eye to eye, but you have to work through it for the greater good of your business.”
Investor involvement is not necessarily a bad thing. Having investor backing was instrumental in Outright later securing larger partnerships with eBay and PayPal to further automate their product. And once credit card and bank data integration was completed, they were able to—conveniently—use their own product to manage their finances. “Up until then, our bookkeeper had been using Quickbooks, which requires data to be input manually,” recalls Reeth. “Having the ability to log on any time and see all our spending and income real time was invaluable.”
With investors in place, Outright grew from signing 50 to 100 customers per week to 300 per day the summer after it was funded. By the time it was acquired in July 2012 by GoDaddy.com, it had approximately 200,000 customers.
Different industries, different expectations
Jay Turo, CEO of Growthink, a Los Angeles-based business planning and investment company, has helped numerous entrepreneurs raise over $2.5 billion in growth capital since 1999.
Investors, says Turo, expect non-high-tech business to take a more conservative approach to managing their money than those in cutting-edge technology startups. “For those entrepreneurs looking to build a solid financial footprint, value will come from multiple earnings when their company is sold three, five or seven years down the road,” he points out. “They need to understand their cash position and drivers of profitability.” Success for these more traditional businesses is not marked by returns that are home runs, in other words, but is more about getting consistent hits. “And sometimes that means foregoing revenue that’s not profitable.”
For tech-centric companies, however, today’s bottom line is of lesser concern. Investors expect a more aggressive business model, focused on investment in IT and technology development. Because there’s such a high likelihood of failure for these technology businesses, when they do succeed, investors expect a much higher return, and that requires more risk-taking by management. Turo describes it as the “go big or go home” model. “These companies are in an industry growing at such a rapid, transformative pace, cash flow is not the driver of valuation and exit,” explains Turo. “It’s more about intellectual property type, subscriber count, and cultivating a highly creative team that can create innovative, break-through products not only today but also in the future.”
Investor capital, if used strategically and managed prudently, can help your business achieve levels of growth that would likely not occur without it. But it’s no substitute for smart management. “Problems you may have had before do not go way with more money but often become harder and more intense,” cautions Blake. He also warns entrepreneurs against squandering VC money paying for services they could get for much less or for free like business and financial advice. For example, Blake notes, “we have a great mentoring community for entrepreneurs in Atlanta.” And even though all that new capital means you have a bigger budget to work with, Blake reiterates that, with it, comes more responsibilities. “You have to be very conscious about the difference between what’s a ‘nice to have’ and a ‘have to have’.”