“We Raised Excess Funding And Built An Elephant” [An Entrepreneur]

Have Hammer? Will Find a Nail?

Sometimes that’s the mantra of startups and even after you have gone through first level of customer validation, it surely is difficult to keep one’s feet close to the ground.

I was recently talking to a startup (enterprise software)  which raised more than $3 million in 2008 (a lot more than what they were looking for) and made severe mistakes along the way. Here is a shorter version of the (anonymized) conversation:

Raised too much money

– While we were looking for $2 mn, things were very tricky in 2008/2009 time. VCs usually operated in >$4mn and angels at less than $1million. So we ended up raising more than what we needed and of course, gave away more equity than what we had intended to.

Show me the money
Show me the money

– With extra money, the first thought that came to our mind was ‘where to deploy this?’.

– Pre-funding, we were just focused on ‘what matters most’, but once we had the funding, the focus was on ‘What else can we do?’.
Pre-funding, the story was all about product development (with minimal features), but once we raised Series A, the feature triage wasn’t so effective (hindsight analysis). We were actually looking for big bang release cycles and also we started an enterprise consulting service, in order to extract the most moolah out of our customer base.

In short, we were building an elephant which was earlier meant to do a pole dance.

– Even from a team perspective, we added a few titles (and hierarchy) to bring in more senior team members. Without relevant titles, it’s very difficult to hire in India and my sincere advice to startups/SMEs would be to ensure that information is not lost in the hierarchy (no matter what titles you have in the company).
Keeping a fine balance makes the cut (ensure that titles stay in the position of power, but do not give them so less power that they use information as a weapon to showcase their power].

So much of money!
“Being from middle class families, we had no idea of how to manage a large sum of money”. Not that we got the entire cash on day 1, but the notion of even this ‘paper money’ was new to us. Hiring a good CA firm probably helps, but more than that, a good company roadmap combined with detailed financials (of marketing/support/hiring/salary budget) helps.

Sincere advice to startups – do two levels of planning –

  • Budget/Forecast for the outside world (i.e. Board, VCs) etc where you share projected numbers. Avoid getting into too much of detail here (use relative numbers like % growth etc)
  • Budget/Forecast for the internal team. Get into as much detail as you can. Include hiring/firing/travel etc expenses, so that the entire team is aware of budget constraints plus revenue forecasts.

This sounds commonsense, but most of startups do not take these things seriously.  In fact, a lot of startups tend to waste money in ‘branded’ stationaries etc, but not justifying such expense is a bigger crime.

How much money is good enough?

During your fund raising exercise, you will come across investment bankers who will suggest you to go for a much bigger round (than what you have planned for), so that you can spend all your effort once and for all in the fundraising process (which might take anywhere between 3 months to 9 months).

My sincere advice would be to really have a budget before you actually follow such advice. That is, do not go for excessive funding just because you are getting one.

Instead, focus on ‘what makes sense for business‘ and you will have the right answer.

Notes from Ashish:  Like I mentioned, this is an abridged version of a conversation I had with a startup whose name has been masked, in order to focus on the main agenda (and not digress on topics that aren’t contextual to this article). If you had a similar experience and want to share (anonymously), do connect.

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