3 Mistakes That Can Kill Your Start-Up Post VC Funding
So you’ve finally made it through to series-A.
Congratulations! You deserve a pat on the back for sure. All those days of hard work crafting the solution, creating the MVP (minimum viable product), testing the market and living on endless cups of coffee, chai — or whatever else works for you — are finally over.
Really?
Hit Wicket — The Harsh Truth
Everybody knows that 9 out of 10 start-ups fail. And the general idea is that 25% to 35% of venture-backed businesses fail. Unfortunately, the actual truth is that almost 75% of VC-backed start-ups don’t get back the capital poured in by the investors. Period.
Venture capital is usually sought to afford the start-up a longer runway to fine-tune the business model, add crucial resources & technology tools, scale up the venture and beat the living daylights out of the competition, if any. But what happens when the founders/promoters/management leaders at the start-up forget some fundamental rules of running a business? Although, this can happen anytime in the course of the company’s lifecycle, it is most damaging when it occurs after raising the first round of VC funding (otherwise called series A).
Here are 3 mistakes that are guaranteed to sink start-ups that have raised their first VC round:
(1) Not having a systemic process for financial & HR oversight: Boot-strapped start-ups typically have the CEO/founder playing multiple roles. However, unbridled concentration of decision-making power on financial and recruitment matters at the CEO levels has been the bane of many organizations. There is a reason why Finance and HR departments need to be headed by independent functional heads who are un-related to the CEO. This is best explained in the words of Subroto Bagchi, co-founder and chairman of the IT services giant, Mindtree, in his book “The Elephant Catchers”,
…there are two functions in any progressive company that must play the role of corporate guardian…these two functions are finance and HR. If the CEO crosses the line, it is the responsibility of the heads of finance and HR to exercise the responsibility of dissent and, if that fails, take up the matter with the board.
Moral of the story — Hire a good financial controller/accountant and a HR head who are unrelated to the CEO and are conscientious enough to call it out when things look fishy or out of line. And make sure there is enough Board oversight.
(2) Failing to behave like a start-up when spending VC Dollars: Often, the flush of raking in the “moolah” can blind the team and make them believe that they need to spend it to justify their new-found success and scaling up. And the culture flows from the top, down to the shop floor. While I don’t advocate downright scrappiness, spending a fortune on high-street office space and decor, when unit-level economics has yet to be achieved is a sure-fire recipe for disaster. Of course, you need clean toilets and comfortable chairs, but are those glass-walled corner cubicles and the fancy wall art really necessary? Does traveling by air and staying at five-star hotels add anything to your top-line?Sure, a Flipkart can afford to spend astronomical sums on making a “Brave New World” after several rounds of massive funding. But I still believe that employees at a small start-up would probably appreciate more money in their salary slips at the end of the month, rather than an extravagant office that has nothing to do with creating mindless code. If you are still rooting for the latter, check out the mindless opulence in the video below.
Moral of the story — Curb the enthusiasm to spend on things that don’t really add to your sales, revenue or customer/employee satisfaction.
(3) Failing to hire wisely and not having an ear to the ground: As start-ups begin to scale post funding, there is the strong urge to hire good talent, sometimes at much higher compensation levels than what was possible in the early boot-strapping days. Here is where a lot of start-up entrepreneurs and CEO’s go wrong.
Just because you have the ability to pay big bucks now doesn’t mean you should splurge those VC dollars hiring high-cost talent from outside the organization, especially if you are trying to fix something that is not broken. Often, these senior-level hires come with fixed ideas from past experience that may not necessarily translate into actionable improvements or growth when applied to your company’s unique problems. Hiring decisions in senior management are almost always taken at the CXO’s level and it may be a good practice to discuss with the rest of the team when you suspect that there may not be a good fit for the new entrant.
In fact, there may even be a case for hiring ‘under-qualified’ employees from outside.
But I am digressing.
The point I’m trying to make is that it can be disastrous to hire highly qualified, top-notch professionals if they don’t fit into your company’s culture or don’t have a clear mandate what they are expected to achieve. From my personal experience, it certainly alienates and demoralizes the incumbent employees, many of whom may easily grow to fill those positions, if trained and encouraged in the right manner.
Sometimes, as you scale, top-management spends less time listening and observing things on the shop floor. Not having an ear to ground means losing crucial feedback coming from not just the staff but also your customers. Without this, you cannot make course corrections in time. And that could mean losing the ears of your investors too!
IMHO, the above mistakes are more likely in the aftermath of fresh funding, but I would love to hear your thoughts on the same. Inviting your comments…
Disclaimer: The views and opinions expressed in this article are my own and do not reflect those of any of my previous or current employer.