Congratulations! You have just got funded. With so much money in the bank, its easy to losing your way and putting the right money behind the wrong reasons. Most startups, who raise angel investments, do not have a solid Board or Senior Advisors, who can guide them in decision making. If not invested wisely, the cash can burn out faster than you thought, leaving your Start Up in a precarious situation.
Here are 10 Pitfalls to avoid, while allocating your newly acquired funds to good use:
1. Bigger Office
One of the first investments made by startups is on their office space. While this may be necessary to accommodate the growing team, think seriously about whether putting your funds into leasing expensive real estate or furniture/furnishings is really going to add value to your largely “digital” business. Your customers are online, an advanced website is a better investment than your office.
With a plethora of Coworking & Managed Office spaces available, put your money to good use.
2. Senior Management
With funds in the bank, its usually prudent to build a team which helps you grow your business faster. But be careful in what kind of team you are building. Hiring expensive, seemingly senior hires can be very cash burning. Evaluate your options and be clear what competencies you need to have in the team. Start with younger energetic team members who will help you execute your vision. A bunch of expensive executives might derail the focus which you are working on for your venture. If you need to have senior people with experience, try outsourced CXOs in areas like marketing, sales, technology, finance and HR. Today, there are many options available where you can “rent”instead of “hire”, at a much lower cost, yet getting the benefits of their experience into your team. Evaluate whether hiring a CXO at 10X the salary you can afford is really justified, is there enough work for him/her at this early stage of your business or is it better to outsource and just get the right amount of skill which you need.
3. Discounted Schemes for B2C models
Discounting your sale in the garb of customer acquisition to grow can be highly cash burning and can kill your venture quickly. be prudent in how you spend your cash. Building your brand and expanding your reach to ensure your core value proposition is understood by your target customer is a better option than quick wins with coupling & discounts.
4. Scale Wisely
You are rearing to scale up and grow your venture. But be careful, if the current business model or target market is still not giving your healthy metrics, it might be too early to scale up. Expanding into new markets or regions, can suck your cash resources very fast and you might still not be able to generate those numbers which will help you create the next investment round. So approach with caution, mainly after assessing if the current business model is working and the target market for expansion is ready or not.
5. Unnecessary Outstation Travels
Some amount of business travel is unavoidable, specially if you are expanding and need to meet customers/investors outside your city. But this needs to be done wisely. Try and plan your appointments in a city together before you buy those air tickets. Take advantage of local budget stays and avoid star hotels. Find local hosts amongst friends, start up communities. Use public transport or shared cab rides. With so many virtual tools available, many meetings can be conducted over Skype, eliminating the need for travel. Save that Cash.
6. Advertising Burn
While advertising your brand is crucial to the success of your business, you have to be careful in what medium you invest in. At an early stage, its advisable to spend on digital marketing, which will give you a better ROI than traditional print/tv medium. Chose your marketing investments wisely, evaluating each campaign and its results on your key metrics.
7. Unnecessary Tech Tools
There are a plethora of web based tools today who promise you exponential results through re-marketing, customer engagement, loyalty, ad management, email marketing, social media management, web enhancement and so on. Be careful in which tool (s) you deploy and why. Do not go over board in using these seemingly low priced tools, as soon you will find your credit card spends going through the roof and your cash burning out.
8. Asset Building
Your CAPEX spend is another cash burn area and unnecessary spending here can be fatal. Investments in equipment, furniture, warehousing, stocks need to be very judiciously managed. Rent as much as possible so that you can shut the expense when not value adding, instead of getting stuck with purchased assets. Remember at this stage of your business, the only valuable asset that you have is customers.
9. Founder Salaries
Lastly, comes the issue of withdrawing Founder Salaries. With cash in the bank, its very tempting to getting your personal cash flows in order. You have worked hard, bootstrapping and surviving without a monthly take home. While its important to do so, remember its very early to start treating yourself to the luxury of a full time executive salary. Instead withdraw a bare minimum required, more like a stipend and not a full salary. The cash is more important for your business. Remember, you started the venture to create wealth and not earn a salary. So invest the cash in your business and watch your wealth grow.
10. Accounting Systems
Lastly, its very important to set up good accounting systems and manage the cash flows. With increased business activity and higher spends, if you do not monitor your cash flows properly, you might end up spending more than necessary. Hire a good accountant or outsource to a CA firm. Ensure you spend some time daily on managing your cash flows and accounts. Prepare a budget and work accordingly. Start raising your next round when you have at least six months of cash left in your bank.