4 great tips on avoiding common pitfalls and critical errors

Startup Funding

There are suddenly 7 digits in your company’s bank account. It’s very tempting to succumb to the glow of success. It’s completely human; after all, you’ve just raised enough cash to support your project- that’s the hard part, right? You’ve worked so hard, you deserve to bask in glory for a little while. Well, I would be a hypocrite to suggest that you don’t throw a party, but keep it to one night and then get back on the horse. There’s still a lot of work to do. Having cash in the bank will not generate any revenue unless you use it wisely. In this article we’ll talk about how to use new funding to hire developers, approach marketing and sales, and determine appropriate methods for monitoring the all important cash flow to ensure that your brilliant idea doesn’t end up on the startup development scrapheap.

1.    Developers: Who should you hire?

You’re going to need a strong team around you, but giving up chunks of your company to people who haven’t been with you since the beginning can feel like selling part of your soul. By the same point, do you really want to entrust your baby to developers who are cheap to hire but are fresh out of school? As Andrey Akselrod of Smartling says, “We’re only hiring senior people…” If you compare salaries [they’re more expensive], but if you compare long-term output — a seasoned person can produce 3x that of a junior person with less maintenance required later on. I think it’s much more efficient to pay more to seasoned developers who produce more.”

The obvious upside to outsourcing development is that with a little research on your side early on, you will be able to find high quality service at a reduced cost – something critical in the startup world because you won’t have to spend valuable time training new employees. Outsourcing teams not only allows you to save money and time, but also frees up both assets to be driven into your business rather than overheads. If it sounds too good to be true, it will be if you fail to properly vet the developers you hire. There are obvious downsides to hiring outside your company. Primarily, you are relinquishing immediate control over the aspect of the project you subcontract out. It is vital that an outside developer is given a clear mission brief and reasonable goals to work towards. Avoid hiring individual freelancers once you raised your round. You now need an outsourcer with a cohesive team to execute your project – a team and that works well together and an outsourcing company that can scale your team.

Additionally, there is the fear factor that a subcontractor will not be invested in your project beyond the paycheck they receive. So chose outsourcers that truly have a startup mentality and love to build great products for great teams. There are steps you can take when negotiating with your developer that will protect both your interests and foster a relationship that can blossom into long-term collaboration:

1) Insist on asking what startup projects your outsourcing vendor did previously and if those projects were successful in raising VC money, leading to exits, winning awards, getting featured in leading publications.

2) Insist on appending to the contract a project implementation schedule that includes as many milestones and deadlines as you find necessary.

3) Agree on what happens after product gets built, what support will be offered to fix bugs and future compatibility issues.

4) Agree on some incentive payments for completing the project on schedule. [1] Giving equity as a bonus will greatly align your outsourcing supplier with your own goals (see “Equity for IT Option” here).

Finally, look out for an upcoming article on this site where we will delve further into hiring the best developers possible for your project, and how to get a competitive price.

2.    Marketing and Sales: It pays to talk to professionals.

It may be tempting to think along the lines of “If we build it, they will come.” That might work for a baseball diamond, but in the competitive market it’s an absolute death sentence for startups. Sales and marketing are areas that are critically misunderstood by many, and this leads to significant problems. It’s common knowledge that we must conduct market research before launch. Unfortunately this is where many stop thinking about the field in its entirety – after all, we’ve established a need for our product, surely people will seek out our innovative solution, and the sales will roll in. The problem is that sales are a result of demand creation, which is a result of the work conducted by marketers. Sales people alone are focussed on nailing the sale, not generating the lead that creates the sales opportunity. With this firmly in mind, it is imperative for your startup to hire an effective marketing head first, and then once their marketing strategy has developed enough leads that you cannot handle them on your own, you hire a sales team. The reason for this is compounded by the frighteningly high staff turnover in the sales industry, which, in fairness to the sales people of this world, is not entirely their fault. When companies fail to produce a great marketing plan to generate leads, the sales people are spinning wheels and struggling. When the sales people struggle, the company loses revenue, and the effect can be catastrophic.

3.    Cash is King!

In the glorious time after raising capital, you can be forgiven for thinking that the next stop is hanging out with Elon Musk and talking tips with Uber. The trick to cash flow management is that it’s all too easy to spend big on things that are critical right now, and forget about the myriad pitfalls that can, and probably will pop up on you from left field. Until you have categorically proven your business model, go easy on the accelerator and concentrate on methodologically increasing the value of your business by hitting your KPIs and milestones. Manage your cash burn rate – a company that just raised its $10 million dollar B Round can run out of cash as fast as a company that just raised $100K seed round if it doesn’t have good controls. And running out of cash is the number one single reason why startups fail. Instead of buying that Aeron Chair set you always wanted, put it towards getting a better sales guy or into development of your product. As always, listen to what your peers have to say!

4.    OK, so what KPIs are important to achieve further investment?

Of course, the particular details will vary depending on the field you are operating in and what round you have just raised. Companies in Seed Round generally focus on building out their MVP and/or getting their 1st 2-3 major test customers. Companies in A round build a more robust version of their MVP product (if it’s a software business, expand it to multiple platforms). Companies in B round and further – focus on growth and competition that will lead to an eventual exit or IPO. Sales, marketing and product development all vie equally for attention. To assist in your planning, consult this list that really nails home what investors will expect to see in terms of measurable growth and progress:

  • Your business has shown some growth, and now requires capital to further expand.
  • Progress from Seed round valuation: goal is to remove some major element of risk. That could be hiring a key team member, proving that some technical obstacle can be overcome, or building a prototype and getting some customer reaction.
  • Your product has reached Beta test, and has received customer validation. Even if your product is finished, without customer validation your value will not rise significantly.
  • The supply chain is in place; customers have purchased, received and are using your product, and feeding back information to you.
  • Your business model has been tested in the real world for feasibility. The cost of customer acquisition is reasonable and therefore the business will turn profit. The money spent by customers exceeds the outlay taken to acquire them.

There is a lot to think about for all startups, but the potential reward of working for yourself, creating something truly worthwhile and setting your own agenda is beyond price. What has been your experience after raising your investment capital? Tell us your story in the comments below!


[1] Outsourcing IT Development: Advantages and Disadvantages, Basil Tesler

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