The Number One Rule for Startups

Mike Collett
Dec 14, 2017 · 4 min read
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Whatever you do, don’t screw this up. And no, it’s not about goats…

There are many traits needed for a startup team to grow and scale, but the NUMBER ONE rule for any startup cannot be stressed enough:

Never ever run out of money

It is as basic as the human need for oxygen. Maybe this should be clarified just to make sure the point is made:

Never ever ever run out of money

Every team thinks they are on top of their burn but once capital of any size is closed, decisions where to spend capital, once studied, get looser in the turn. One day, everyone wakes up and realizes that net cash burn is way too high. Whether a team has raised $2M or $50M, the issues are still the same just on a different scale.

So what are some tangible ways that founders and boards break this simple rule? Here is a list of the most common cash management mistakes we see across ALL stages:

1) Fundraising Stops After Round Closes

You’ve closed a round congrats! When should you start fundraising again for the next round you ask?

Answer: Tomorrow.

The founding team should always be raising one round ahead. A startup’s cap table should ideally be full of deep pocketed investors that have long term vision and investment reserve for the company if the team executes successfully.

A team should make it a habit of routinely meeting with investors of every stage. This not only establishes a relationship early but allows continued progress updates and if the startup is successful, easier checks for them to write in the future.

This is a long game, and startups better dig in or else they stand no chance.

2) Dilution Greed

“We don’t want to give up more than (insert some random %) dilution at this early stage because in six months we’re confident (insert some customer) will be signing and then we’ll go raise a new round off of that at a higher valuation.” Fiddlesticks. It rarely happens that way. Taking the risk of not bringing in more capital today is far greater than suffering more dilution than planned.

Get the cash in the door and raise more than what your plan is.

3) Saying Yes to Customers Not Core to Strategy

It is very difficult to say no to early customers that want to pay you for something not entirely core to your strategy. Very hard. Government contracts are many times Exhibit A in this area for deep-tech or non-consumer hardware startups. Sometimes this works out, but more often than not budgets are pushed and the amount of time spent with these customers dwarfs the time needed to hunt other more important commercial customers.

Startups should be careful who they say yes to in the early days — the opportunity costs of time are enormous.

4) Spending on Features Rather Than Function

Version 1.0 will always be lacking in something, just accept it. If a product is good enough, customers will jump over the desk to hug founders for solving one of their company’s major pain points. They will take whatever they can get even if it only has one or two basic features (and not the ten more features the team envisions). Get the core product to market AS FAST AS YOU CAN. Showing revenue and product/market fit is essential.

Studies show that 100% of the time Version 2.0 will never be built if you run out of cash building Version 1.0 (sarcasm dripping).

5) Hiring Sales Team Too Late

Enterprise startups wait too long to start hiring their sales team. This situation unfortunately plays out in way too many startups. A team doesn’t want to spend any capital on an enterprise sales person and allocates everything to engineering, so they end up waiting until the product is finished before hiring the sales team. The founding team is out selling so that should be enough (right?).

In reality, founders wear many hats each day so the focused, dedicated time that 1–2 salespeople can bring is immeasurable. Moreover, these positions are mostly variable compensation so these positions are not as expensive as believed.

Sales positions are also difficult to hire, many don’t work and this often isn’t baked into the financial model. Ultimately, the team ends up wasting precious capital when the product is finished waiting for the sales team to figure out how and who to sell. And to boot marketing support is often an afterthought. Get sales people on the ground in the field far earlier than you think.

Cash management is a boring topic that rarely is a mantra of many startups. Too many teams burn the candle all the way down to months of cash left in the bank and are left with frantically meeting last-minute new investors to keep the company afloat. Let’s just say it speaks volumes when a team is months away from running out of capital and is still pitching new investors on the round.

By avoiding the areas above, startup teams will put themselves in a position to manage cash better, take money when they don’t need it (the best time to fundraise) and sleep (somewhat) more peacefully each night.

Go Build

Startups and VCs

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