By the time rapidly growing companies get funding, they often have 101 different priorities they can address and, similarly, 101 different ideas for how to spend that fresh infusion of capital.
We often see this at OpenView Venture Partners, where our portfolio companies are under the gun to build out their teams and take their organizations to the next level by developing into finely-tuned customer acquisition and retention machines.
But with so many options and needs, how can a company possibly prioritize what to spend capital on first?
Should it be a management team? Sales reps? A true marketing organization? Branding? Product development? Customer success? A bigger, better team of engineers who can scale the product and its functionality? More aggressive lead generation and customer nurturing?
The list of possibilities is virtually endless. And, frankly, many startups fail because they lack the focus needed to intelligently budget and allocate their funds.
10 Decisions that Burn Capital and Stunt Growth
So, what can growing companies do to better assess what they should be spending their capital on to extend their runway and improve their chances of long-term success?
Sometimes, ruling out the things startups definitely do not want to spend their money on is a great way to start the prioritization process.
1. Hire a complete set of senior managers right after forming your company
If there is one thing senior managers are great at, it’s hiring other managers. Before you know it, you will end up with more layers of management than you need, and those managers will cost (and spend) more money than your startup is prepared to shell out!
2. Hire senior managers from large companies
These managers tend to be even more inclined to spend money on additional management layers as well as many different staff functions. Until you’re a large company, you may want to resist the temptation to hire large company talent.
3. Re-locate your team to an expensive city
Your staff will need more cash to cover cost of living, so your salaries will be higher. Your rent (and everything else) will be higher, too (see this infographic ranking the cost of startup cities). Yes, operating out of cities like San Francisco or New York may give you better networking opportunities or greater access to talent, but at what cost? The barriers to startup creation and growth aren’t what they used to be and several of our most successful portfolio companies are operating in not-so-traditional or up-and-coming tech hubs like Austin, TX.
4. Ramp up staff quickly in anticipation of high demand
As you scale, your current staff will spend more of their time recruiting and training (lowering productivity), and your new staff will have a lower initial utilization as well. If you really let this get out of hand, you will establish a long-term culture of not being productive that will last through all phases of your company’s evolution. Hiring and retaining talent is one of the most important steps of building a great, big business — but you’ve got to approach the recruiting and hiring processes in a very focused and targeted way.
5. Use your marketing resources on branding things you don’t really have
You’ve secured initial traction. Prospects for growth look good. So, it’s time to step on the gas and market your company as a market leader — despite the fact that your product may not actually possess the features and functionality of a market leader.
6. Use your sales resources on field sales and large company partnerships
These are the activities that cost the most and take the longest to turn into revenue. Activities like demand generation, inside sales, and developing more natural business partnerships, meanwhile, are far more capital efficient. To learn more about how to cost effectively acquire more customers, check out this guide on how to build a B2B lead generation program.
7. Hire a large development team but completely ignore packaging and UI
To be successful, you’ve got to have a great product. But what good is that product if it’s not intuitive to use, simple to understand, and easy to implement and configure? Spending all your money on development is a recipe for disaster, particularly if that leaves you needing to also hire hoards of professional services, customer success, and customer service staff to help actually use and troubleshoot the product after the fact.
8. Don’t emphasize cross-team alignment and communication
If you’re not holding regular staff or company-wide meetings, or taking advantage of other communication methods to help focus your teams, then you don’t have a prayer of achieving clarity, resolving questions, and running your business efficiently.
9. Get backing from two or more VCs with very large funds
“The larger the better,” you tell yourself! The problem? Big firms need to deploy more capital and will own more of your company over time. They’ll also be more than willing to give you a few more ideas on how to spend that capital.
10. Don’t put any management systems in place
By neglecting to establish budgeting, metric management, or incentive systems, you’re virtually guaranteeing your teams won’t be focused on the right activities or the key drivers that will actually move the needle for your business. Quarterly reviews are a critical component of scaling a business. If you neglect to put them in place, it’s unlikely that you’ll spend capital on the right things.
Is Your Company Spending its Money Wisely?
For early-stage tech companies, the growth vs. capital efficiency dilemma is a constant tug of war.
This debate has become quite acute lately with the volume of expansion capital available to VCs and growth companies. But that access to capital is a bit of a Catch-22: The more capital available, the more capital is raised, the more capital is spent, and the more capital is burnt.
Ultimately, it doesn’t matter how much money your startup raises if it doesn’t spend it wisely. Because at the end of the day, sustainable growth isn’t fueled by money — it’s fueled by intelligent vision and laser-focused execution. If you do those things right, then money will always be a natural byproduct of your efforts.
Which mistakes have you found lead to unnecessary capital burn? And how would you advise startup CEOs to best allocate their money as they grow? Start the conversation in the comments section below!
(Photo credit: Mike Poresky, Maciek Lulko, and Tax Credits via Creative Commons)
