A lot of startups chase funding like a dog chasing a car – in that they wouldn’t know what to do with it when they caught it.
In all honesty, I would never try to tell a startup leader how to put their cash to work. You did all the hard work, so you deploy your capital in whatever way you see fit. But I know that for every startup that gets funded, there are thousands more who are trying and failing.
And 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.
The Best Funding Plans Use the Four Ts
Now, I’m also not here to tell you why you should raise money.
But 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.
I’ve been through over a dozen startups and advised dozens more, with an about-even split between venture-funded and revenue/self-funded – in fact, I’m working on one of each right now.
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 who back SamBoad
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 + expected revenue – 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’s the only case.
Talent: How Much Experience Will You Bring on Board?
In almost all fundraising cycles I’ve been through, talent is the first place new money gets allocated. I mean, if I could hit my goals with the team I’ve got, 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, customer success and care, as well as doubling down on resources to help the first bucket do their job so the cycle can continue.
Tech: How Much Growth Will You Automate and Scale?
These days, technology is a critical component of any new business, whether that business is tech-centric or not. Buying or building new technology is going to be the X-factor in determining how much of an outsized 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: Pro-tip: Most new founders, especially tech founders, tend to allocate 100 percent of their tech spend to innovation. 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.
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 are 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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