Receiving venture capital (VC) funding can be a milestone for many startups, but it also comes with high expectations and risks. Many startups fail after raising VC money, either because they run out of cash, lose their product-market fit, or face competition. How can you avoid these pitfalls and make the most of your VC funding? Here are some tips to help you succeed.
Your burn rate is how much money you spend each month to run your startup. It determines how long you can survive before you need more funding or revenue. To avoid running out of cash, you need to manage your burn rate carefully. Track your expenses, prioritize your needs, and cut unnecessary costs. You also need to plan your runway, which is how many months you can operate with your current cash balance. Aim for at least 12 to 18 months of runway, and start looking for more funding well before you run low.
2023 (and likely beyond) is very different from the past 20 years. Now cash is expensive, and growth should be moving together with profitability. Founders and management need to have a very strong visibility on their cash-burn, and path to profitability. Be ready to trim your project portfolio, and take other unpopular actions. The biggest risks for a start-up are problem over-simplification, stretching too thin across products/geographies/countries, rejecting internal and external feedback. Read the article on Sifted on the failure of Babylon Health.
Super important step - 80%+ firms FAIL because of this !! Key Steps - - calculate your monthly expenses for next 18 months + 20% buffer - raise this much amount in your next round - track your monthly burn and reduce all unnecessary expenses - focus more on organic marketing instead of paid one - add value to customers at appropriate price SUPER Imp in today's RECESSION times
The first thing is to hire a strategy consulting firm to help you firm up your true GTM Strategy, Sales, Marketing, and Operations Strategy as well. Having a Strategy to go back to for checkpoints, to show your investors where and why money was spent on specific resources is important. Also having this strategy in advance will help you only spend money on what will truly bring in revenue, which means returns for your investors and increased ramp up time for your sales. ?Hiring the right talent, not just general talent. (Your Operations strategy comes, prior to hiring-Compensation & Job Descriptions included) ?Having a strong actionable strategy for sales and marketing that compliments each other.
Have a margin of safety built in to your growth rate. Stuff happens and rushing to raise to plug a hole in cashflow increases the risk of a down round.
The purpose of the VC money is not to build a business but to build a company. I believe 75% founders doesn’t no the difference between them, which is the root cause of burn out and company failure after securing the VC fund. In short, managing burn rate is not just controlling the company expenses but also increasing ther company’s revenue 1. Diversify Revenue Streams 2. Regularly Audit Expenses 3. Engage in Strategic Forecasting
Your product-market fit is how well your product solves a problem for your target market. It is the key to achieving growth and retention. To avoid losing your product-market fit, you need to validate it constantly. Talk to your customers, collect feedback, and measure your key metrics. You also need to adapt to changing customer needs, market trends, and competitive threats. Don't assume that what worked before will work forever. Experiment with new features, segments, and channels, and pivot when necessary.
Nothing will ever matter. No product decision. No competitive analysis. No expense management. No hiring processes or practices… If YOU, the Founder/Owner/Leader doesn’t know how to lead. Most start up failures are a failure of leadership skill not of management tactics. And yet…the importance of learning how to lead is rarely highlighted as the ONE superpower that fosters business success. Get your head out of the spreadsheets and a boardroom and learn how to coalesce the hearts and minds of team members to drive and sustain engagement and business results… Learn how to communicate when it’s easy and when it’s hard. Learn how to build and conduct accountability practices. It’s that simple and yet all-too-commonly overlooked.
Achieving PMF is MOST imp as per reputed VCs like a16z, Y Combinator, Sequoia Capital and others. Most founder's calculate and track PMF WRONGLY !! They believe that more revenue or more customers or more sign-ups means reaching PMF. Instead, signals of reaching PMF - - More organic users & referrals - Increasing trend of LTV and declining CAC - Good reviews and product ratings - Rapid growth in key metrics
? Data-Driven Decisions: It's not enough to just collect customer feedback; ideally, you should use data analytics tools to quantify it. ? Competitive Intelligence: Regularly monitor what your customers are saying and what they are saying about your competitors. ? Predictive Analysis: Use machine learning algorithms to anticipate customer needs before they even realize them themselves. ? Lifecycle Value: Your product-market fit isn't static. For example, early adopters may value different features than the late majority. ? Agility: A well-defined but flexible strategic framework can help pivot effectively. This includes preparing financial models and forecasts that account for different scenarios related to product-market fit.
It is important to consistently validate and remain open to change as markets and preferences continue to evolve... get some great people on board!
Consistently checking feedback is important to stay relevant and effective. But, it's essential to avoid letting this slow down decision-making. Markets and customer preferences change constantly, so it's necessary to be adaptable and responsive to stay competitive.
Your team and culture are the backbone of your startup. They determine how well you execute your vision, collaborate, and innovate. To avoid losing your team and culture, you need to scale them wisely. Hire the right people, not just for their skills, but also for their fit with your values and goals. Train and empower your employees, and give them clear roles and responsibilities. You also need to foster a positive and productive culture, where people feel valued, motivated, and aligned. Communicate your mission, vision, and values, and reward your team for their achievements.
HIRING is the most underrated step in any company. Having right team members consisting of diverse background, different skills, different work ex years as it leads to good learning culture. Most people wrongly hire by looking only at skills and degrees. Instead HIRE people based on good habits and character as they do not change easily. Skills can be learn if one is hard working and consistent. No wonder, some VC's consider TEAM as the most important factor while analysing a startup.
Define your values and beliefs (aka your culture) first, then build systems to support and maintain it. Often passion-driven founders forget to be intentional about their culture. Your VC is betting on you and your team. Hire an Ombuds to help you improve your communication and conflict skills. Your Ombuds will also grow your managers and coach them to resolve employee conflicts early without involving you. Sure, it might seem tough to spend early funding on culture, but you can pay now or lose much more later. #Ombudsareessential
?Having an Operations strategy immediately that includes: Talent Needs, Compensation Structure-so you have comps that fit the market which helps determine your talent budget, Proper talent training, and so much more. ?Having the right people advise you from the beginning, not after the money is almost gone. If you know certain things aren't in your wheelhouse as a leader, hire expert help for those immediately so that you can be properly advised.
It's important to maintain a startup's unique identity when expanding, as rapid hiring can compromise the company's values. Don't forget the heart of your business! that's you.
? Cultural Debt: Much like technical debt, cultural debt can accrue if you scale too quickly without maintaining core values. ? OKRs and KPIs can quantitatively capture your team's performance and alignment with your startup's vision, serving as excellent motivators and focus areas. ? Remote vs. In-Office Culture: The decision between remote and in-office work can significantly affect your culture. ? M&A Impact: In the startup world, acquisitions are a frequent endpoint. Understanding how such transitions will impact your culture is vital for seamless integration. ? Equity and Incentive Plans: Beyond salaries, offering stock options can align the team with long-term company performance.
Your VC network is a valuable resource for your startup. It can provide you with advice, connections, and opportunities. To avoid wasting your VC network, you need to leverage it effectively. Communicate regularly with your investors, and update them on your progress, challenges, and needs. Seek their feedback, guidance, and support, and listen to their insights and suggestions. You also need to tap into their network, and ask them for introductions, referrals, and recommendations. They can help you find potential customers, partners, mentors, and hires.
A startup can get following benefits from VCs and hence its very imp to choose right VC for funding - - financial support - taking crucial decisions based on their experience - hiring as VCs have good visibilty - access to various tools as VCs have good network with tech companies and buy in bulk - lots of potential cuustomers - access to other VCs for next rounds and many more
It is essential to keep in mind that venture capitalists have their own agendas and priorities, even though they can provide useful guidance. As a founder of a startup, it is vital to differentiate between advice that supports your company's vision and suggestions that do not.
Be cautious when taking advice from venture capitalists, as their interests may not align with your vision. Speak with founders and angels...
? Investor Updates: Consistency in investor updates can pave the way for deeper conversations. ? Investor Skills Matrix: Understanding the specific skills or networks that each of your VCs can bring can help you reach out to the right person for the right problem or opportunity. ? Advisory Board: Beyond just the investors, a strong advisory board built through VC introductions can catalyse growth or even overcome key business challenges. ? VC-Driven Talent: Investors often have a pulse on executive talent in your industry looking for new opportunities. Utilizing this can help you fill key positions more effectively.
VCs have seen hundreds of companies and thousands of pitches. So, they have a great perspective on what worked in the past and what is working now in your field. They likely have great strategic advice for you. They may not want to get into the details with you, but if you can get an experience partner to meet with you once a month for an hour, you will benefit substantially.
Your market and competition are the external factors that affect your startup. They can create opportunities or threats for your growth and survival. To avoid being blindsided by your market and competition, you need to monitor them closely. Research your market size, trends, and dynamics, and identify your niche and value proposition. You also need to analyze your competition, and understand their strengths, weaknesses, and strategies. You can learn from their successes and failures, and differentiate yourself from them.
As Peter Thiel says in his famous book, "Zero to One" - Competition is Deadly, it's important to have less competition by focusing on white spaces. Also create a moat/ competitive advantage to distinguish yourself with your competitors.. Stay connected with your customers, take their feedbacks seriously, visit your competitors (both Indian and global) shops/ check their products to learn from them too. Fast execution is crucial here !!
? Feedback Loops: Besides studying the market and competitors, building robust customer feedback loops can offer critical insights into how the market perceives your product vis-à-vis your competition. ? Scenario Planning: It's beneficial to prepare for different scenarios based on market trends and competition. For example, what if a competitor lowers their prices significantly? Or what if new regulations shake up the market? ? Use of Technology for Monitoring: Use AI and Big Data analytics tools to provide real-time insights into market trends and competitive positioning. ? Collaborate to Compete: Many startups have succeeded by forming strategic partnerships with businesses once considered competitors.
Make sure you know your market front and back, be in touch with your customers and learn from them. Use that to differentiate yourself from the competition. As a start-up it is essential to have something different to offer, and avoid competition as much as possible.
To keep your business true to its values and stand out in the market, it's important to stay committed to your unique value proposition. This means staying aware of your competitors' actions while remaining loyal to your core identity.
Surveying the market and competition is a great opportunity to engage with interns. If you near a good university, see if you can set up an internship program. Most schools offer credit to their students for an internship. Students also view this as an opportunity to enter venture capital. You will get super smart, energetic people. If you design the project for them well, you will get great results.
Your core metrics are the numbers that measure your startup's performance and health. They can help you track your progress, identify your problems, and optimize your decisions. To avoid losing sight of your core metrics, you need to focus on them consistently. Define your key performance indicators (KPIs), and align them with your goals and milestones. You also need to collect and analyze your data, and use it to improve your product, marketing, and operations. Don't get distracted by vanity metrics, or metrics that don't reflect your true value and impact.
Not all metrics equally matter. Prioritize metrics that directly impact your business goals. Avoid the trap of celebrating hollow victories with vanity metrics.
Make sure unit economics is a core metric from day one. Profitability (or at least a clear path to it) needs to be as much a focus as top-line growth.
The purpose of the VC money is not to build a business but to build a company. I believe 75% founders doesn’t no the difference between them, which is the root cause of burn out and company failure after securing the VC fund. In short, managing burn rate is not just controlling the company expenses but also increasing ther company’s revenue 1. Diversify Revenue Streams: Continuously seek opportunities and adopt alternative business models. 2. Regularly Audit Expenses: Implement monthly or quarterly reviews to identify and eliminate unnecessary costs 3. Engage in Strategic Forecasting: Anticipate future financial needs, potential market shifts.
Looking to raise a lot of money and don’t know how it’ll work out? ?? ??????????: ??????????.????????.??????????????????. I had a founder looking to raise $1.5M but they had in no way the necessary network, traction, or track record for them to get investors excited enough to give them that much $. So I simply recommended them to stage the fundraise. How does that work? — phase 1: raise a more appropriate amount for the current level of experience — phase 2: put the phase 1 capital to work and start attracting more investors and, therefore, more money
This will seem odd in the context of VC investment, but control your growth. Rapid growth is a big and unnecessary risk. Don't worry about investor growth pressure. It's your company. Grow in a controlled manner. It's a marathon not a sprint.
Regular Evaluation of Suppliers and Vendors' Performance Studies have shown that many sponsors feel underserved by their suppliers and vendors. To avoid any potential issues early, you could consider implementing vendor performance monitoring systems: 1. Assess the variance between expected and received services 2. Evaluate risks such as supply chain issues, expenditure, and staff turnover to gain insight into vendor efficiency 3. Set Key Performance Indicators to measure metrics, trends, outliers
I think you avoid failure well before you get the VC injection by carefully planning ahead all your activities and associated expenses together with some allowance for unexpected events. This plan is also your key to convince investors to invest in your startup.