How Successful Businesses Spend Startup Funding
BY: DAN STEINER ON WEDNESDAY, DECEMBER 14, 2016
You got funded. That finally means you made it. Well, not exactly. All it means is that someone decided you were an investment they could make some money on in the future. That does absolutely nothing for your business other than give you the money to grow and operate.
Many startups blow through funding quicker than the deposit clears their bank. This is due to a number of reasons, but the most common are:
1) it’s easier to spend someone else’s money
2) companies fail to budget properly.
So what exactly should you spend your startup funding on? While there is no set formula for where to allocate funds, here are some things to keep in mind before writing your first check.
Curb Your Salary, Maintain Outside Income
When you think of “initial” funding, many people forget that most initial funding comes from founders. They drain their bank accounts, max out credit cards, and borrow money from friends and family. Every penny is counted so that there is little, if any, waste and the business can stay afloat until it pulls a profit.
When a company receives injection capital, thing change. The money is no longer coming from your own pocket so it can be easier to spend as though you don’t have debt. When it comes to salaries, successful companies continue to pay themselves as if they are bootstrapped.
Does this mean you stop paying salaries? Absolutely not.
One of the most common mistakes an early-stage startup makes is deferring founder wages and other compensation to save costs prior to raising a financing round,” writes Caine Moss. “Unfortunately, this can lead to a significant legal and tax liability.”
The ultimate goal is not to treat your funding as a raise. Maintain salaries if you can, but do not start paying yourself as if you are a unicorn or just went public.
Another thing you must do is maintain any income that you normally wouldn’t undertake (e.g., revenue from side ventures or employment). According to Slidebean, this can help keep you from burning through cash too quickly.
“During the early stages of Slidebean, we made approximately $5K a month in projects for third parties, which included online marketing and web development. We probably used 40-50% of our time in consulting work and used the rest to work on Slidebean. This allowed us to work on the tool without burning through our cash too fast.”
Marketing, Advertising, Media Outreach Spending
You can’t stay a secret forever. You need to let people know who you are and what you have to offer.
Even if you are not in the selling stage, you need to start investing in a media outreach plan. Once you launch, you will want to make sure to get your message out as quickly as possible. Having a plan in place ahead of time will help you do just that.
Marketing yourself will also help with branding and future funding. An easy way to do this is by using content marketing as a way to write helpful content for your potential customers.
People will want to know more about you and your website is not necessarily where they will first look. When they search for you on Google, you want the search results populated with news stories that talk positively about your company. Your products, services, founder story, etc. should be right out in front of people to easily find.
“There’s no profit in being unknown, but it’s easy to feel trapped between a rock and a hard place – namely having no money to pay for marketing, and having no income because you have no marketing,” writes Charles Anderson, CEO of Currency. “Equipment financing can seem like something that only applies to bulldozers and refrigerators, but it can be applied to anything inanimate – such as marketing software and collateral.”
Reputation management is also something you need to consider. Your digital footprint is probably positive, but what happens if someone tries to disparage you? Will you be ready? Have you worked on establishing positive press in order to minimize anything negative that may be published?
So, how much do you spend on marketing? There is no safe answer if you are a startup.
“To estimate marketing expenses, start with the amount of monthly retail sales you need your store to generate,” writes Matthew Hudson. “For this, don't consider what you want to sell, rather what you have to sell to stay in business.”
Of course, we are not all in retail and sometimes we are not in the sales phase of our business. If you cannot calculate your marketing budget based on sales, you can at least engage in some guerrilla public relations and marketing until you can set a proper budget.
Add This Person To Your Team
At this point we have only determined you have more money than you had the day before. You also know you need to spend some of that money, but you don’t know on what or how much. So who in the hell is going to help you figure this out?
Hire an accountant. You can no longer fly by the seat of your pants when it comes to money. You are now using other people’s money and you need to be accountable for that.
“Even if you are years away from bringing on investors, having an accountant with your company at the start means having someone who knows, and has watched, your finances from the very beginning,” writes MyCorporation.com CEO, Deborah Sweeney. “An accountant is an invaluable ally in creating a reasonable financial projection, and for proving your company is well-maintained and solvent.”
An accountant can help you keep track of income and expenses and provide you with advance warning of any shortfalls. You are also now accountable to investors so you need to be able to provide them with detailed financial statements.
Taxes for your company are about to get messy. In addition to the complicated tax code you already face, there are now new taxes you owe based on your funding.
The fact you received outside funding says that your company is growing. That means you need to start focusing on the parts that matter to you the most. Focus your time where it’s needed and let the experts take care of the financials.
Final Thoughts on Successful Startup Funding
The main point here is that successful companies don’t spend money like it’s water. They keep track of their finances using an accountant and curb their salary and other spending.
Now that you are moving up in the world and other people are betting on your future, you need to make sure you show your worth. Brand yourself with the world and spend wisely.
What are some startup funding mistakes you have seen? What is the first thing you would advise a startup to spend on with new outside funding?
Image via Shutterstock