21 May What Should Your First Round of Investment Go To?
It’s no secret that building a sustainable business takes money. But few startups have enough of it to build quickly. So they turn to fundraising, believing that money is the most important aspect of their company’s future success or failure.
It’s not. Every business, small and large, needs to know exactly how they are going to use their capital to best position their product and company for success. In other words, the planning that goes into using the money is far more important than the total amount of money raised. Yet we glorify fundraising and rarely discuss financial planning and how to use the money once it’s raised.
What will you use your first round of funding on? Sure, you probably have a rough plan in mind — 35% for marketing, 10% for legal expenses, etc., but do you really know and understand what you’re going to spend it on and why?
To avoid blowing through it, your seed round of funding needs to be optimized. This could be the difference between reaching another round of funding in the next couple of years or being forced to close your business.
Think of your startup as the production of a movie. Your seed round should fund the final preview of your movie. This preview will build interest in your business, attract investors, and prove the general concept and functionality of your business.
A seed round of funding isn’t for salaries or ordering new office furniture; it’s for barebone essentials like core equipment and services you can’t operate without.
This is why constructing your core team carefully is so important. Skills your company needs that the founding team doesn’t have will need to be paid for via hires or freelancers, which limits your abilities. Paying developers instead of having a team capable of creating an app or website puts your business in a tough spot because that’s money you can’t use for other needs.
Startups are creative and agile, but if you don’t carefully plan and execute a financial plan when using your first round of funds, your startup won’t last long enough for that to matter.
If your goal is to build a business, then eat ramen, live in your parents’ basement, and work 12-hour-days. Funding helps extend your dreams, not fulfill them. Plan carefully to make the most out of every dollar your business receives from investors.
Need help planning how your startup will budget after your first round of funding? Start before the money comes in. I can help. Contact me at Michael@ConsultStraza.com.