Management of your startup post-funding
Many founders make severe management mistakes after the closing of a financing round. We will discuss these and provide insights how to prevent them. And we will provide insights how to make sure that your startup could get a next fundraising round easily if needed.
Typical management mistakes post-funding
We have been through this many times: You are relieved that the financing round is over. You can get your focus back on the business. And you have money to do all the things you and your team have wanted to do for a long time.
What feels quite good is highly dangerous. Here is why:
- Pressure is down: KPIs during the fundraising round have been crucial. Everybody knew that sales or other targets need to be reached to make it happen. Now that the round is closed things are a bit more relaxed.
- Cost will go up immediately: Over the last year nobody has asked you for a salary raise. Nobody wanted to do projects that do not have an immediate return. This is very different now: The team enquires for higher salaries, more benefits, hire new people, buy better tools etc.
- People get distracted: The last and most dangerous factor is the loss of focus. Various projects are coming up (again) – after all there is money for doing it now.
Many startup CEOs are in a good mood and give in. The plan how to triple valuation done in Phase 3 is far away. And they wake up 12 months later realizing that they have done lots of great things but are far from reaching the value inflection points that would triple valuation.
Fine-tune the plan to triple valuation
Make sure you don’t belong to the CEOs described above. Instead, start to fill the plan you elaborated in Phase 3 with life. This must be done with the team to get full commitment.
We suggest to plan a two day workshop with an agenda as follows:
- Set the scene
- Mission/vision: Repeat where you want to go in the long term
- Present the targets that you want to reach over the coming 24 months
- Present the base plan that you did in Phase 3 – the objective is to challenge and improve it over the coming two days
- Discuss why it is crucial to reach the two year targets
- Do brainstorming sessions (1 hour each)
- Unlimited funding: Could we reach objectives within 12 months if we had all the money in the world?
- Hiring: If we could hire any person in the world: Whom would we take? What difference could these persons make?
- Saving potential: Could we reach the plan within 24 months with half as much money as planned
- Risk: What are the key risks to miss the 24 month target? Sort them by probability and impact. Discuss how to mitigate the top 3 risks: Can we double down on certain key projects? (e.g., hire two sales teams in two different geographic locations)
- What could we stop doing to get more efficient? Projects, internal or external reporting, processes, meetings, events, … – create an atmosphere where everything can be challenged
- Finetuning: Work out a solid plan together, with projects, key hires, etc
- CF planning: Make sure the budget is available to reach the plan over the coming 24 months. Make sure is enough cash for at least 36 months to be on the safe side!
- Stop or delay things: Make a list of things that the team agrees not to do anymore or put on hold until the key objectives are reached
If your startup has less than 100 people we recommend to do this process with the entire team. You need all of them to be fully behind it to make it happen.
Set ambitious milestones/OKRs and review after 3 months
Now that you have a solid plan it is time to break it down into smaller pieces. Most tech startups use OKRs to do this, but any system to define objectives, tasks and responsibilities is fine. Keep it simple. It is much more important that your startup “lives” a certain system than to follow an exact methodology or implement a complex system.
Once you have aligned and set these milestones you will fully focus on execution. As always, do periodic meetings and continuously keep the defined milestones on your radar.
Planning your first post-financing quarterly meeting
The quarterly team meeting three months post-financing is a crucial one. This is where you start seeing whether the updated strategy works or not. You will obviously not see all the impact yet, but it should be very clear whether things are moving as planned or not.
Review all the company OKRs in an all-hands meeting. Celebrate the ones that are going well. And be radically transparent where things are not working as planned. While you can still turn things around in the initial one to two quarters, you will realize that the money raised is burned very quickly if you can’t get the desired traction. It is this initial phase after a financing round where you have everything in your hands. This phase decides whether your startup becomes a great further success or whether you are going to run out of money without the prospect of a financing round at a significantly higher valuation.
Great CEOs are very strong leaders post-financing. All the others realize after a few quarters that tripling valuation is much more difficult than planned.
Hire great new team members
After a funding round most startups will hire new employees to make the plan happen. From experienced VPs that can bring certain areas to a new level up to lower level employees. Potentially also 1-2 independent board members. You will want to get these hires quickly to increase chances to reach the aspired plan.
One of the most important things is to hire the very best possible talent for these job openings. No CEO would disagree. But as already discussed in Phase 1, most startups are terribly bad at recruiting. Most hires are erratic and unambitious.
So here is the secret: You should be as good at hiring as the very best companies in the world – Google, or McKinsey. You obviously don’t have the brand strength and compensation packages they have. But you have a sexy tech startup where people can make a real difference. So there is no reason you should not get the very best talent: We have consistently hired people who had offers from some of the most renowned companies, but preferred to work for a tech startup.
Hiring is very similar as fundraising: It’s about executing a great process. We recommend to do it as follows:
- Define job profile: Define the requirements very precisely. What does the person you are looking for need to be wildly successful? Does such a person even exist? Discuss with a few people who have such a job role, and with some VCs who may have seen this play out. Fine-tune until you think the profile makes sense and is realistic.
- Get 100+ applications: Post the job opening on all relevant platforms. The 2,000 bucks for this are the best investment ever made – think about the difference the right person will make. Directly reach out to persons who could be a fit. Hustle to make sure you really get great applications.
- 15-minute video call with the Top 10: Go through all the applications and select the 10 you like best. Schedule a 15 minute video call with all of them, where you want to find out why they applied, check specifics of their profile, discuss compensation (you don’t want to find out in the third interview round that you are far away from each other), and tell them why you are excited about a potential joint future.
- 2 hour meeting or video call with the Top 3-5: Fully understand their CV, do a case study (you will be surprised how quickly you see how someone actually thinks and works – and that results can be very different from what you expected – both positive and negative), discuss the job opening incl. expectations, compensation, Q&A, next steps.
- 2 hour team meeting with the Top 1-3: Present the final candidates to the team, take a final decision.
In the early stage it will be you to manage this process. Over time you may get an external recruiter and/or internal HR resources. Considering that you will hire lots of people as you grow quickly, it is crucial to have efficient hiring processes. Here is a great article describing how a tech company efficiently hires software engineers.
Relationship with shareholders
Keeping your shareholders happy is crucial. If they are happy they will support you – introduce you to B2B partners, potential employees, amplify your LinkedIn messages etc. Even more important, they will participate again in future financing rounds. We know from previous phases how crucial this support is.
How do you make shareholders happy? Obviously the best thing to do is execute and reach the aspired milestones. But a solid communication structure is important. They should be close to what is happening, support you in tough times and celebrate successes. Here is the typical structure of such a communication structure:
- Monthly reporting: The monthly report should contain 1-5 key numbers of your business (e.g., nr of app downloads, MAUs and paid subscriptions in a B2C company), supported by a short email explaining the key developments. The CEO should be able to do this within 1 hour and send out the email within 2-3 working days after the end of each month. It is ok if the numbers are not 100% accurate – the exact figures will be in the quarterly report.
- Quarterly reporting: The quarterly reporting should provide some solid financial insights. A cash flow statement can be ok in early stage companies; over time it should be a P&L enriched with some key figures of the balance sheet (liquidity, potentially AR/AP, inventories). Similar as in the monthly report, the quarterly report should come with a short email from the CEO describing the key developments. The quarterly report should be sent out within 15 working days after the quarter end. Within one week after sending out the numbers we recommend to schedule a 30 minute shareholder call where the CEO and CFO describe the key developments (10 minutes) followed by a 20 minute Q&A.
- Annual report: The annual report should not include any business surprises – this would have already been communicated in the monthly reports. But a solid annual report is required for tax and legal reasons. Make sure you have a good accountant or CFO and make sure you comply with all regulations. The annual report should be sent out within 3 months after year end latest, followed by the general assembly to which all shareholders are invited.
- Ad hoc communication: A periodic nice email of the CEO can go great lengths – e.g. if you have positive media coverage, reached a milestone, or gotten a great customer review. Trust your gut feeling here, and don’t exaggerate.
Depending on your shareholder structure and the location of your shareholders you will want to add informal calls or meeting with specific shareholders.
Build a strong network of potential future investors
Now that the information is still fresh in your mind is the time to clean your long list with a view of the next round. Safe the spreadsheet as a new file, and reclassify the entire list as follows:
- Stage 2: All investors where you feel they could be great for your next round. These are the ones that told you that they like your case but considered it too early for them to invest. Send them the media release of the past financing round, jointly with a short personal email that you are looking forward to stay in contact.
- Stage 1: These are all the investors that could be potential investors, but where you are unsure or don’t really have a personal contact yet.
- Stage 0: These are the ones you don’t think will be a future fit. Don’t delete them! You never know what happens in the future – there may be a convertible loan, a down round, a spin-off or checking previous write-ups where you are happy to have a comprehensive file in place.
Now that you have a solid base list you should try to keep the Stage 2 investors excited about your progress and add potential new investors to the list. Here are the most effective ways to do this:
- LinkedIn: Most startups don’t use the potential of LinkedIn effectively. We suggest to do about one post per month with meaningful updates about your industry. It should be things that are of real interest to your business contacts or indicate major progress, and not just “boring company advertisement”. Obviously there should always be the angle how your own startup is relevant to the news – but put things on a higher level. Such posts should be written by the CEO, not the PR agency.
- PR: Make sure there are frequent relevant media releases about your startup, and that they are covered by key media in your industry. Having a great PR agency is crucial. As this is a people’s business you may need different partners in different countries if you are international. It is typically better to go for boutiques than large international agencies as long as your budget is small.
- Congresses: You need to know the organizers of the key events in your industry, and be present there. They may showcase innovative companies at such events, organize online events or provide other formats for your company to increase visibility.
What is needed to kick-off your next financing round?
There is no mathematical formula to tell you when you can or should do a next financing round. In some cases it is more attractive to go for break-even, getting a loan from a bank, or trying to get acquired by another company.
The following things should be given before considering a new financing round:
- The valuation of your startup has increased substantially: The pre-money valuation of an upcoming financing round should be substantially higher than the post-money valuation of the round you just closed. What does “substantially” mean? In the previous phases we have worked out a plan to triple valuation within 24 months. Most shareholders should be very happy if you reach this. Depending on the risk profile of your startup and investors an increase of 50% could be ok; some aggressive early stage investors may target 5x. If you have done a solid investor diligence you should understand what your shareholders are looking for.
- You have an attractive equity story: Raising an additional round should generate much more value than going for break-even. What would you do with additional funds? Grow faster? Expand geographically? Develop an additional product to open a new market segment? Acquire another company? As in your previous round these questions should be answered clearly, and result in an equity story that is attractive for investors.
Fast-growing tech startups with high ambitions typically raise new funds within 18-24 months.
Consider raising funds much earlier than needed
The best time to raise funds can be in times where you don’t need them. So while you should now have money to run your business for more than two years, it can be attractive to consider opportunities for a fundraising before. This is frequently and aggressively done in Silicon Valley, but not so much outside where entrepreneurs and investors tend to be more conservative.
Let’s say you close an important B2B deal within 6 months after fundraising, or see that your B2C business is growing at great speed. This is a perfect time to think about a new financing round, even if you don’t really need the money (yet). Don’t be afraid to go out with a 2-3x higher valuation, even if the last round has only been closed 6 months ago. Contact us if you would like to have a chat about such options – we are happy to connect you with CEOs in your space who have done this, and support you in raising funds from some of the world’s best investors.
Final note: It’s about the journey, not the destination
The objective of creating a unicorn or doing a Nasdaq IPO can be a big motivator. This website provides insights how fundraising can help you getting there. However, it would be naïve to focus too much on getting there: First, chances that you ever do a Nasdaq IPO are minimal. Second, even if you do you will not be happier than now. Lying under a palm tree in the South Sea drinking Piña Colada gets boring after a few months. For some of us already after a few days. And for everybody after a few years.
So while a future exit can be a big motivator, it is about the journey as much as the destination. Nobody should choose entrepreneurship for an easy lifestyle. But equally, don’t forget that there is more to life than building a startup. Keep sane, and keep being a nice person. And let’s use entrepreneurship to make the world a better place!