The slippery slope of startup funding
14th April. SocialHelpouts office. 11 pm.
Nikunj: Guys, we need to pitch in VC round table tomorrow morning. Can we make a funding deck tonight?
Anubhav (rolls his eyes): We are raising funds?!
Nikunj: Not really. I had filled up an application form for a pitching event. They shortlisted us.
Vinit (opens a pitch template): Guys, we need to put in a funding amount. How much will we need?
Nikunj: I think we can do with $250K.
Vinit: I’ve heard that no matter the amount, the investors will take 15–20% stake. How about putting 1.5 million?
Anubhav: Better. But how will we justify the spend?
Nikunj (pulls a rabbit out of a hat): We need to hire 4 engineers + 2 marketers + 2 support/sales. To house them, we will need more office space and yeah we could also run some ads.
Vinit: That still won’t use up 1.5 million. Let’s hire more in tech to build a mobile app and validate other verticals we want to attack.
That’s when it hit us. We were going down the all familiar slope so many startups have gone down before.
The mistake is common. Raise huge funding just because it’s available and then figure out ways to spend it on things like nonviable discounts (like Foodpanda), overhiring (like TinyOwl), crazy marketing blitz (like Housing.com) & funky parties (like Stratton Oakmont).
So we reminded ourselves again. When we raise funding, we would:
- Raise only the amount that we need. In return of a smaller stake.
- Raise more if investors really insist, but let make clear that the money would remain unused in the near future.
Will this work? Would love to hear experiences from those who have tried doing something similar.
(At SocialHelpouts, we are disrupting job boards by noiselessly connecting startups with the right people. Our first milestone is reaching 250K users and we are sharing our journey on our blog. Read more posts: why we didn’t raise funding early on and these are our hiring lessons)