One of the biggest tests of startup founder savvy is the period after you’ve just raised funding. It’s akin to the Amish rite of passage rumspringa, as young and sometimes inexperienced founders are given the opportunity to explore new opportunities in the hopes that the experience will ground them and strengthen them as leaders. Unfortunately, many do not find their way back to the path of revenue, or even to a product roadmap.
Funding is often sought out to scale up a product, but it can also be your worst nightmare. If there’s one thing we learned from the dot com bust, it’s that you should be looking for your revenue model before building the in-office climb wall or partying on luxury yachts. Silicon Valley business lawyer George Grellas explains, “In early-stage companies, you will regret such spending when you hit the bumps in the road where you wish you had that cash. Inevitably, you will hit such bumps. Plan accordingly.”
This funding problem isn’t so much about founders not knowing about free web apps to run their everyday business or the cost savings of an elastic workforce and cloud services. This funding problem is one where a ramen profitable company has just been given what it believes to be a blank check. Funding is not a blank check, it’s a promise to get the company to an agreed upon milestone in the hopes that the value of the business will grow. If the value of the business grows, investors, cofounders and hopefully early employees will benefit.
The sooner you hit your milestones (if the business model and product roadmap are correct), the less likely you are to have to issue more stock and give more of the company away. In other words, the less you waste on luxury items, the more likely everyone you work with is going to get paid. Retain your staff with decent pay, good machines and a comfortable chair, but let them know what they stand to gain by hitting the milestones.
Every successful entrepreneur will tell you to spend where you know you’ll see a return on investment – the right business development mix, good engineers and a solid infrastructure. Remember that if you do manage to see a lucrative exit, you’ll have all the time in the world to live the high life, but for now, maintain your focus and stay as lean as possible.
If you’ve got lean startup tips, by all means leave them in the comments below. As well, cautionary tales of good money being thrown after bad are also welcome.
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