You’ve presented a compelling story in the boardroom. The investors are impressed, and voila: your startup has secured a round of funding! What next? In these times, it is important to ensure that capital is spent carefully, with an intention to succeed. It is important to be armed with a sound plan after laying out your goals. You will learn where a startup should invest its capital that helps them avoid going bankrupt.
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A Startup’s Trajectory
As a startup either enters the market or scales up, it requires financial aid from investors, more often than not. Even those startups that try their best to stay self-funded may require the aid of investors at some point. Venture capitalists invest in startups after analysing their likelihood of being successful. Once a startup has established itself successfully, it may open its shares up to the public as an IPO, which can become a source of funds by itself.
The following are different kinds of funding that startups receive at different points of time:
- Seed funding: Seed investment is done by angel investors, etc. in the very early stages of a company’s setting up. It helps with the initial processes including design, development, production, etc.
- Pre-series funding: These accelerate the existing operations and product development of a company.
- Series A funding: Series A funding is the first major chunk of capital that a company is invested in. Based on how the company takes it forward, it may also secure Series B funding, Series C funding and so on.
However, more than 90% of all startups cash out within the first 3 years of founding, mostly due to a lack of funds. Careful spending can play a big role in determining a startup’s success rate.
What Any Business Should Spend On
All businesses need to spend money on a strong team, processes, research and development, market research, brand awareness and visibility, tech tools, legal advice, tax advice, and customer service, to name a few. However, it is important for a business to prioritise their spends on the areas that will be crucial to the goals that they intend to achieve with the funds they get.
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Why Careful Spending Is Important Today
It’s a winter for startup funding. The boom of funding that startups had been enjoying has declined due to various factors like war, inflation and others have checked spending. Investors are trying to protect their wealth. Business funding for startups is seeing a drop. At this juncture, it is particularly important for startups to be mindful and optimise their capital for the best use.
Thriftiness is key. It is crucial for startups to have a well laid out plan once a round of funding has been secured.
Startups are expected to act on the promises they make to investors which got them to invest in the first place. A solid, well-planned spending system goes a long way in attracting future funding as well. Moreover, startups at this juncture are at a risk of losing talent. The mass layoffs that have recently occured, along with the limited funding, is making many employees leave startups in favour of a more stable position in a bigger and well-established organisation. In this scenario, better planning and optimised spending would lead to greater stability, and help retain employees.
What Startups Should Not Spend On
A startup should carefully choose their expenses. Certain expenses, if not thought over wisely, can be wasteful and counterproductive, such as the ones below:
- Acquiring too many full-time employees
- Overspending on branding
- Employee perks
- Investing In The Best There Is
Acquiring too many full-time employees
Many startups make the mistake of going all out on hiring when they get a round of funding. This could be a wrong move since employees are a permanent and long-term expenditure. For this reason, many startups nowadays prefer to outsource and hire freelancers rather than full-time employees to lessen expenses.
Overspending on branding
A startup requires time to be established. Early branding could not only be a premature activity, but also an unrequired expense. In the very early stages of a startup, the brand is still getting established and is not yet consolidated. Until the business is well established, it may be futile to spend lavishly on branding, since the style could be subjected to change. Expenditure on branding and marketing strategies including PR, paid advertising and physical events should be done very carefully in the early stages of startup.
Employee Perks
Going overboard on employee perks should be avoided by startups. An expensive offsite, lavish parties or a posh office space should not be a startup’s expenditure priorities. A startup should bear in mind that employees don’t have to be permanent. Though they should be incentivised, going overboard on maintaining employees may not be sustainable for a company’s financial health.
Investing In The Best There Is
As much as top-quality tools help speed processes and operations, a startup can simply not compete with established companies and MNCs when it comes to using the latest tools irrespective of their expense.
What Startups Should be Spending On
To scale up, startups spend their funding money on various areas such as talent acquisition, product development, customer services, marketing, salary hikes for employees, etc.
“Founders not only need to work out sustainable unit economics but need to keep track of bigger market changes and be nimble enough to absorb unexpected costs.” – Tim Doyle, CEO, Eucalyptus
However, the most important area to focus on is product-market fit. What are the most important things you need to invest on to facilitate sales and turnover? Depending on your domain and your product, you need to focus on the right variables to make the most of your funding. For some businesses, this could include marketing costs that may be crucial to its growth. For others, it could be research or production. This also depends on what stage the company is in or the series of funding. A more established company may not have to invest too much in visibility and marketing, and may have to optimise and enhance existing infrastructure for growth. For a domain with heavy competition, the startup may have to focus on an outstanding USP and an indispensable product.
Careful use of funding ensures a company is on the track to success. Irrespective of the outcome, a company should aim to chart a steady and sustainable path to success. Good financial planning and optimum use of funding go a long way in reaching for success.
