Got investment? Now for the real hard work
Getting investment is often touted as the key goal of a budding entrepreneur, but funded founders and investors agree that this milestone actually marks when the hard work starts.
A million-dollar investment validates the efforts of a "ramen" start-up, one that has bootstrapped its way out of the parent's garage, but big money carries big responsibilities, which forces start-ups to instantly become more accountable.
So, how can you make the most of your funding, keep your investor happy and decide when you should chase the next tranche of cash?
Invest in a person, not just the product
Entrepreneurs and investors can sometimes be at loggerheads but there's one thing they agree on: investment is not the end game.
In fact, it's just the beginning.
When Posse founder Rebekah Campbell signed the funding documents that delivered her $1.2million in late 2010 her joy was quickly replaced by the realisation that she now had 23 new bosses to answer to: her friends, family, and angel investors.
Immediately, she had to prepare for next month's board meeting, where she explains the business in terms of key metrics including user numbers, retail numbers, and engagement levels. These have taken place every month since.
She had to get to work on the Posse rewards/loyalty system.
The first task was to hire the best employees, whose skills complemented her own and bought into her vision. The long process would take years. She had to fire the wrong people first so she knew who the right people to hire were.
"It's harder to put together the team than it is to raise the investment," she said.
Ultimately she was assisted by her investors such as Freelancer.com's Matt Barrie, Atlassian's Scott Farquhar, and Facebook's Lars Rasmussen.
For Campbell, investment is the third biggest challenge for a start-up: behind product-market fit, and then team and culture.
She would find the product-market fit two years later, when she overhauled the business model to scale faster and more profitably.
She shifted the target from music bands to small retailers, where customer "champions" could be rewarded if they referred friends. The new strategy would also secure $1.2 million injection of funds from another group of investors but first she had to convince her existing backers.
Campbell had already demonstrated her capacity to execute on her vision, and she used metrics to explain why this was the best business opportunity. Moreover, she was convinced this was the future.
The shareholders unanimously approved.
"I didn't realise it at the time but people invest in your ability to make these important decisions when you need to," Campbell said.
"Not to say you take it lightly, but we knew what we needed to do."
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Venture capitalists are active investors
A plan, passion, and conviction are the major qualities an investor seeks, according to Starfish Ventures partner Tony Glenning.
He says entrepreneurs become accountable when they accept investment, which is designed to test assumptions.
"Every investor is going to ask you: are you going to work hard? Are you going to make this happen? They want to see in the whites of your eyes that you really mean it because you are taking on responsibility, there's no two ways about it."
This primarily centres on the company plan, a prophecy of sorts.
Before any papers are signed, the entrepreneur and venture capital investor will hash out a five-year plan, with quarterly goals.
For example, the salespeople need to follow up on 20 leads a day and convert five of those leads.
To assemble the big picture, it extrapolates these details – such as staff costs, revenue generators, marketing spend, lead generation and conversion – to predict the cashflow and capital expenditure.
The business plan measures the performance and it's possible to see results within the first six to 12 months.
For this reason Starfish partners are actively involved in the business, Glenning states unequivocally. They will usually meet the CEO at least once a week, in addition to monthly board meetings, and quarterly updates.
"We would say this is an advantage, not a disadvantage," he said, and added he hopes the Starfish portfolio companies would agree.
"If a founder doesn't want people involved in their business, then don't go to venture capital."
The biggest mistake
It was a similar situation for Adioso co-founder Tom Howard, whose "ecstasy" of the first investment – $15,000 to join the Y Combinator accelerator program – was quickly overwhelmed by the pragmatic reality that they had to find a way to make money from their intuitive flight booking search engine.
The Y Combinator stake was succeeded months later by a $70,000 investment from five YC connected angels; and a year later, another group of angels, including Gmail founder Paul Bucheit, invested $350,000.
Each subsequent investment brought less cause for celebration, and more concerns about how to pay the bills.
"Each new raising just buys you some more time to keep trying to make the business successful," Howard says.
With a war chest at the ready in 2010, Howard devised one major criteria to govern the spend: it must produce intrinsically valuable technology assets.
"As long as we ended up with an asset that could be sold for more than the amount of funding we'd raised, then we'd be in a strong position, even if we ran out of cash."
The pair would in fact suffer that less than a year later, in early 2011, when, in a panic, they violated their own "product-first" rule.
Their product wasn't ready for general use but they used a chunk of capital earmarked for development to advertise Adioso.
It was their biggest mistake. Don't panic, he thought.
They survived week-to-week by whatever means possible, investment from friends, freelance gigs, partnerships, and even the R&D tax incentive.
The pair, friends for over a decade, used the free time to contemplate their commitment to their chosen path. Eventually, the inspired vision and fresh hires attracted more investors that kept the dream alive.
Bailey and Howard had no regrets. They realised wastage on wrong hires, wrong features, and aimless marketing is a part of the learning curve for an early stage start-up that aims to create a new paradigm.
As Adioso gears up to raise the next round of investment, the pair aim to achieve the YC formula: a 5% weekly increase in key metrics will create an attractive investment proposition.
Top five key things to remember:
1. Rebekah Campbell's start-up priorities: product-market fit; team and culture; and investment.
2. The business plan is a schedule of milestones to hit after you raise investment. Get it right the first time.
3. Venture capital are active investors.
4. Funds should be used to produce intrinsically valuable technology assets.
5. Y Combinator advises that a 5% weekly growth rate in your key metrics will position you well for investment, according to Tom Howard.