When you're raising money, the pressure starts with the idea of the effective utilization of the raised amount and making it worth on different fronts like scaling, product improvement, revenue generation and profitability enhancement. But it’s quite challenging to find the right balance of these certain spending.
With these general tips, you will be more likely to make the most out of your raised money.
Make sure (and be highly aware about the way) you're spending your money in the right places.
In case you're tired of spreadsheets, our portfolio company Cashplannr solves this exact problem.
Don't be afraid to ask for help in making tough decisions.
Think ahead. What will truly bring your business to land the next funding round, desired acquisition or profitability.
What Should You Spend?
You've just raised money from your investors, and you're feeling pretty good about yourself. But now comes the hard part: figuring out how to make the most of that money. How much should you actually spend? It's tempting to go on a spending spree, but you need to be careful not to overspend. You probably don't want to run out of money before you've even had a chance to get your company off the ground. So coming to the real point: how do you know how much is too much? And where should you spend your money? The answer is clear = Start with figuring out your burn rate. This is the rate at which you're spending money, and it's a good way to get a sense of how much you can afford to spend. You can find your burn rate in your financials or on websites like Cashplannr. Next is to watch out over your overheads. Your fixed costs, like rent and utilities, can quickly add up. Therefore, budgeting for your expected cashflows can only not help you with optimizing the venture’s financial position but it will serve as a point of awareness in the internal decision making process providing confidence to stick with the made decision. Last but not least is to spend money where it counts: Invest in things that will help your business grow, like (scalable) sales and product development. As these are the two fronts where you can make your product worth using adopted to the needs of the users and sellable.
Who to hire first
Usually, hiring is the first stop on the road to make your business grow towards the next step. There are two big categories of typical post-funding hires: product development and sales. Who you should hire all depends on the business model, stage and high level goals of your company. If you're looking to raise a VC-led A round within a year, focus on reaching high ARR. If your ideal customers are corporates, look for medior/ junior sales people to help you, the founder(s), close the deals while the product is ready to scale for a large usage.
What's a healthy runway?
Startups typically have a shorter runway than larger businesses. This is because they haven't yet proven their concept or gained market share. They're also often more capital-intensive, as they're spending money on product development, marketing, and recruiting. Ideally, you want to have enough runway to get to profitability or at least the best financial numbers to show to your next potential investors. This means having at least 12 months of cash on hand, especially right after a funding round. This number can vary depending on your industry, stage of development and other factors. But it's important to remember that not all startups will make it to profitability. Some will pivot or get acquired, while others will fold. So it's important to have a Plan B in place in case things don't go according to plan. This might include more fundraising, partnerships or even layoffs.
One can only have cash in hand if the all the spending are optimized by considering the following steps:
- Use of technology to automate tasks. This can free up time and resources that can be better used elsewhere.
- Outsourcing of non-core tasks. This can help you focus on your core competencies and save on costs.
- Doing things on your own. This includes everything from marketing to accounting. By doing things yourself, you can avoid paying for expensive services.
- Being frugal. This means being mindful of your spending and only buying what you need.
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