June 26, 2016
You’re part of a bootstrapping group of entrepreneurs living off of peanut butter sandwiches and coffee. You’re desperate for some form of sustainability. Or maybe you’re one of the top dogs in a five year-old company going through their fourth round of funding. Does what you should do with your round of funding change depending on what stage you’re in? The obvious answer is “yes.” That’s not wrong, but every startup regardless of size or age has the same goal: fast exponential growth.
Startups are stressful enough without constantly worrying about paying your own bills at home. Pay yourself enough to be comfortable. The more you stress about your own finances, the less energy and focus you’ll have for your budding enterprise. I can’t say what would be comfortable for you, but recent survey data shows that 66 percent of startup founders pay themselves less than $50,000. Plus, Silicon Valley tech titan Peter Thiel says, and I’m sure many others have agreed, “the lower the CEO salary, the more likely [a startup] is to succeed.” After you can stop stressing, focus solely on what will make you grow fast.
To be clear, a pool table or some variation of “creative workspace” will not help you grow fast. It may help you appeal to needed talent, but it’s not directly helping you grow. Neither is paying more to be in a “better” location. If you and your team can work out of your respective bedrooms and meet up at Starbucks, you’re good to go. That said, here’s a few valid options to consider.
Most startups will place the bulk of their funding into customer acquisition, which usually looks like digital marketing, and tends to make investors happiest, particularly in first couple of rounds. Whatever your startup does, you have to be able to gain significant (hopefully majority) market share. The key with this, though, is that you need to constantly be finding new ways of decreasing your customer acquisition cost along the way. If you’re spending money on customer acquisition, you’d better be focusing on optimization and continual A/B testing.
Hiring talent might be the biggest use of funds. It could easily take $120,000-$150,000 to bring in the person you need to get you where you want to go. If you want your idea to transcend your team, to become bigger than you alone could ever be – which is kind of the point of entrepreneurship – you need to bring in people far better than yourself. Better people cost more money.
Research and development, good ol’ R&D, is another major (and incredibly important) use of funds. You will always learn more about your market and what they need or want. There will always be a way to make your product better. There will always be a way to make it easier to sign up and/or use your product. You will always need to innovate to stay ahead of the competition. Your product is the reason you exist. It’s what customers are paying you for. Make sure you do it right.
Once you become larger, say maybe around your second or third round of funding, it will probably be more beneficial to focus on long-term strategic partnerships. For instance, one of Mark Cuban’s larger investments, “Kayak of car insurance” TheZebra, is focusing their latest round of $17 million on expanding partnerships with auto insurance groups. For others, it could be integrating with top CRMs like Salesforce or HubSpot. Or maybe your long-term strategies include incredibly intensive R&D, like anything Elon Musk works on. It might even be wise to use that money for buying out other startups!
Every successful startup reaches a stage where they have to hire explosively to grow. That doesn’t necessarily mean bringing in top talent, but you still have to pay more and more people. For example, Bellhops, an on-demand moving company, is using a large portion of their most recent round of $13.5 million to hire engineers for headquarters and movers all over the nation to expand into new markets.
There’s a slough of ways to use your funding. Of course, you need to define its use before you start pitching investors, or they’ll just gruffly ask that you do so quickly. At the end of the day, no matter what size you are, the basic principle is that you need to focus your dollars on where you will grow the fastest.
There’s no reason for you to keep stressing about your own finances, but any comforts of work-life, like great office space or free espresso for everyone, come second to what will bring you exponential growth. What’s going to grow you fastest and most efficiently? That’s what you should do with your round of funding.
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