Spending Precious Capital: A Startup How-To Guide

Derek Hutson — April 3, 2017 Follow @dahutson

As a technology CEO and angel investor, I am occasionally asked for advice on raising capital, timing, how to invest the capital you do raise and other decisions that can make or break a young company. Often, those questions come from founders or executives who are seeking their first or second round of “institutional” money to launch or grow their company. For those who know me, it’s no secret that I’m a frugal guy. My kids might even be a bit more candid and say, “Dad, you’re just plain cheap.” So be it. I’m proud to admit that mentality extends into my business life too. We don’t need a giant chrome panda to remind us to spend our capital wisely. If you ask Datical employees about our culture and how we invest our capital, they’d probably make comments about focus, creating value and delighting our customers.

We’ve been hyper-focused on execution and remaining lean from the very beginning. Our mentality and approach doesn’t fundamentally change as we grow. We’ve maintained that identity through rapid growth and appropriate follow-on VC funding, critical junctures during which some in the tech startup community get distracted by proverbial shiny objects and lose sight of the real objectives.

While creating a highly enjoyable work environment, offering great benefits and other perks are critical, having the “coolest” office isn’t the objective, nor is serving unlimited meals, snacks and beer. Providing irreplaceable value to customers is the objective. Having happy customers is the objective. Growing the business long-term is the objective. And raising capital is not the goal — it’s a means to those ends.

So once a startup is given some capital, what should they do with it? The adage that you have to spend money to make money is true to some extent, so how can founders, CEOs and other leaders spend capital intelligently, effectively and efficiently, continuing to hit the growth targets and live up to the potential that earned them that capital in the first place? In other words: If they had one dollar left to invest, what should they do with it?

Make hiring talent your number one priority, and don’t compromise.

People are our company’s most significant expense by a long shot, and rightfully so, as they are our most important asset and most vital place to invest. If you establish your company as a place people truly want to work, then the talent comes to you, and talent breeds exceptional products and happy customers. Understand that people want to work with other people who are just as experienced or even overqualified for job they have, to the point that you’ll often hear, “It doesn’t matter what I’m building, just that I’m doing it with this team.” It may seem obvious, but without bringing in premier talent from the bottom of your organization to the top, you can kiss any prospects of long-term success goodbye. Commit capital to this cause.

Invest in exemplary leaders and advisors.

Rock solid leadership makes a company, and nothing breaks a company faster than poor leadership. Use capital to recruit the right leadership team. Prioritizing which leadership positions to hire for first depends upon many factors, including company stage, size and others. Here are a few constants to consider: Hire leaders who complement your own expertise, bring diversity in style and experiences. Hire leaders with proven track records growing companies. And lastly, the saying to “hire people smarter than yourself” definitely applies. When hiring a leader for your company, you need to be able to answer how your company will be materially different within three to six months directly because of the fact that you hired this person. If you can’t readily answer that question, pass.

Scale your sales funnel and business structure.

If you’ve received capital, it’s safe to assume you’ve successfully sold your product a few times. Now for the fun part – repeatability and scale in your sales efforts. Start “professionalizing” your sales organization early. Hire people with a proven track record whose sole job it is to smartly, avidly and repeatedly sell, sell, sell.

Assuming your product is ready to scale, invest in your sales and marketing organizations. Insist on instrumenting your sales funnel, achieving repeatability and measuring everything. Sales and marketing are more science than art. Make sure you understand the key milestones or stages of your sales cycle and activities required to meet them. It’s also important to understand what it takes to optimize the conversion between these stages. A common mistake is believing that you must wait to start measuring pipeline, demand creation, maturity and cycle time. You can (and should) do that from your very first batch of leads and sales.

Never stop innovating on your product, but make sure it’s in the right way.

You got to this point because you built a product that has value – it solves a problem. But don’t rest on your laurels. In parallel with scaling, continuously innovate and build upon your product. As I once heard, “make your product too good to ignore.” Part of using capital wisely is only developing capabilities where you already know there is existing market demand. Invest in product management, cultivate that competence in your organization and ensure there is a sound business case as you add to your product. Innovation is a key part of enhancing value, but it needs to be pragmatic innovation.

Be flexible and adaptable, but don’t thrash.

One of the wonderful things about small, growing companies is that they are adaptable and can change quickly if needed. Be strategic about your investments by deciding on the three or four things you must do, making those investments and then keeping your eyes on the prize by executing without diversion. When you need to make changes, make them fast. Measure results and make the inevitable tough decisions. Some companies lack the discipline and focus to stay the course – they thrash about looking for the proverbial magic to happen. The “magic” happens when you have the right team, product, market and capital in place and you flat-out execute better than your competition.

Raising a substantial Series A or B sum of venture funding is always an exciting time for startups, and exceptionally so for first-time founders and executives. Pressures and questions mount quickly as soon as that capital is nailed down, but the most successful startup leaders always have a plan in place for how they’ll spend the capital before they secure it, and then they stick to the plan both fiscally and culturally. Follow the pieces of advice laid out above and you’ll be in great shape to make your investments count, help your capital go a long way, execute, grow and reach those all-important end objectives.

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