How To Avoid 3 Big Mistakes That Waste Your Precious VC Cash
An important transition occurs for companies as they secure their first and second rounds of external money. You are expected to begin monetizing the great idea--the concept that has kept your startup team working long hours and producing great work, and that has persuaded people who have studied a lot of business opportunities to invest in yours.
With this investment comes a transition to an operating company with a whole host of problems the entrepreneur really doesn't want to think about, and doesn't have the experience to solve. Over the past 20 years I have seen businesses succumb to some temptations that are difficult to reverse and can slow or kill the great business idea.
1. Expensive big city real estate
In the excesses of the dotcom boom I used to visit companies in the nicest offices in London who had zero revenue and no clients, but huge real estate overheads. It seemed like the same team of real estate guys were going round with a model that plotted 500sq. ft. per person with ping pong tables, bean bag breakout rooms, and expensive art and furniture. Mercifully in the current funding boom things don't seem as bad. In London we swapped the West End for Shoreditch, and in New York Brooklyn is flourishing.
Some startups seem to persist with a perverse need to keep all employees under a single roof and in the same conditions to preserve culture. It is accepted as a truism and actioned accordingly. It isn't true. How often do your accounts and software engineering teams hang out?
2. Overpaying for talent
When you have made the mistake of taking on some expensive real estate this tends to follow. You are forced into hiring talent in hyper competitive job markets with lower corporate loyalty. Compromise follows compromise, you need more HR to manage the churn and the corporate culture you are trying to build suffers body blows.
3. Losing focus
While your backers are expecting you to be commercializing your big idea, you've somehow gotten off track with building your operation out. Your time has been taken thinking about ergonomic chairs and sleep pods, HR policies you didn't need before, and hiring people for positions you didn't realize you needed and that certainly weren't in your business plan.
You've started to lose connection with the problems you set up your business to solve. This is a real and pressing issue that can make the difference between making it or not.
VC-backed businesses are generally on a faster growth trajectory than other businesses. These are basic business problems that are compounded with the pressures that external funding bring. Smart use of partners can help companies through this phase.
1. Use Serviced Offices
While serviced offices are never as cheap as your own space, you can be sure they will be functional, because someone else is thinking about chairs and air conditioning and Internet and business continuity planning. As critical is the ability to expand rapidly as required to meet business demand, rather than at a time where there is little certainty.
2. Use outsourcers, until they can't do what you need done
Outsourcing companies can help you quickly and with certainty resolve resourcing issues for legal, IT, HR, software development, sales, marketing, and operating functions. By utilizing both onshore and offshore labor and dipping into global labor markets, most businesses will be able to significantly speed up their time to breakeven.
One Financial Technology firm, Numerix, literally needed rocket scientists to help with its financial modelling, and being based in New York didn't want to compete for this talent with the big Wall St banks locally. Clearly their needs were such that outsourcing wouldn't be the right option. So what did they do? They went off and found some NASA rocket scientists who were surplus to requirement and built a hub in Santa Fe which suited both the talent and the firm.
3. Embed new technology in your processes
Cloud-based technology such as collaboration solutions from Oblong and Bitium continue to make it easier for remote teams to work with your core teams in productive and cost-effective ways. There are a host of CRM and customer support platforms such as Zoho and Five9 that are cloud-based and plug and play.
Strong partners know how to work with and build mutually beneficial relationships with entrepreneurs like you, and can pivot as you do. For your side you get simpler budgeting, clearer costs, and your life back. And your VC guys? They will welcome with open arms the better exit probability.
IAN JACKSON | Columnist
Ian Jackson is a managing partner with Enshored, an operations consultancy and outsourcing business based in Los Angeles. Prior to founding Enshored, Jackson worked for 20 years in financial technology, leading global businesses for Barra, Multex, Reuters, Dealogic, and Fitch Ratings.