Startup Funding: Things to Consider Before Spending Raised Funds
You probably already know how you will spend raised funds; otherwise, it would be extremely rare you even managed successfully to raise money without that information. If you couldn’t show how the funds will be used for good business purpose, investors wouldn’t give it to you.
Everybody wins when the new funds generate growth, and that is why investors are only interested in Startups that know how to put money into good use. Investors expect that those funds will be dedicated to product development, marketing, sales or whatever helps to hit the important milestones and grow the value of the company.
How specifically those funds will be used depends entirely on the specific situation of your Startup, but in general, Startups raise funds for the following:
1. To Scale Their Team
After raising funds, Startups are looking to hire a top-notch team to scale and build their products.
Things to consider before scaling a team
How secure is your founder team?
The number one reason Startups fail isn’t because of running out of money; it’s because their team quits soon. Before you start focusing on hiring new people, try to figure out how you will keep your team excited and lower the percentage of people who will leave you. Sometimes even if you raised the money, you would need to replace your co-founders and start over.
2. Technology Upgrade
This would include the expense of making the product more scalable and robust.
Things to consider before scaling
Before you start building new features and hitting promised milestones pause for a moment to revise your building blocks. Many companies go with a very fragile architecture that satisfies current needs and then face the problems once they want to scale.
If the infrastructure and technology you use are not able to support your growth be ready to knock it down and start from the beginning. We helped many Startups to build a reliable and robust architecture after raising funds, so now they can scale without a problem.
Avoid pitfalls by creating a scalable architecture for your project.
3. Market Expansion
Diversification of customer base in terms of segment, demographics or just location.
Things to consider before you expend the market
Do you know the lifetime value of your customer? The average revenue per buyer? Think about a consumer business. About your demographic and audience. What do they expect? Can it be stretched? What about different audiences? Have you tried pricing changes? No? So do that first.
4. Hiring Sales
Most companies spend a vast amount of money to create a sales distribution channel to reach potential clients.
Things to consider before hiring a sales team
Before run and hire your sales you should go and rethink everything — product/service marketing, sales, partnerships, etc. Define the metrics that matter, understand how the funnels look like, and what actions are most likely to work. Challenge your marketing and sales channels. What sources of traffic are profitable, and which channels are converting, which aren’t?
Your goal is to find a way where you can make a double that you have spent. When you have that, then you can start spending money on building a sales team.
5. Building a Reputation and Investing in Marketing
The more you invest in marketing more you will be able to sell and charge. Or would you?
Things to consider before starting marketing activities
Doing a small-scale test of every marketing or sales campaign you make is what you should be doing before starting with high amounts. Run campaigns assuming most of them won’t pay out. You need to see if a particular channel is profitable. Most of the time when you target paying customers through Google Ads or Facebook you find that the more traffic you buy, the higher each unit costs are.
The good side of testing is when the crazy marketing idea doesn’t work out, your downside is small, but when it does work out, the upside is enormous. When you hit, it’s likely to be profitable consistently.
Conclusion
Once the money is raised, investors will pressure you to start spending even without knowing that this directive is a bad idea. Why? Usually, it’s because the founders were doing precisely what they needed to do to raise money. In fundraising, the goal is to show that your startup will be successful and investors want to make a profit from it.
So try not to fall under their influence and take as much time as you can to consider all we mention above before start spending raised funds.
Read next:
