You and your team have just closed on a new round of capital. Some of you are tired and weary. All of you are glad to have it done. Now you can keep the momentum rolling and do the things that you’ve been wanting to do but didn’t have the capital to previously execute.
Here is where you would expect something like, “Well you’re wrong! Don’t lose your edge! Have to stay hungry! Don’t lose focus!” No, I’m not going there because anyone who just got a fresh supply of oxygen in the form of cash to continue their existence deserves a smile and fruity drink. Teams that don’t celebrate their wins implode with stress — this is healthy and necessary.
Many teams say “business as usual!” after they’ve closed their round, but you’d be surprised how these words sometimes ring hollow. Here are five of the top mistakes we see from our perch at Promus Ventures that founding teams commit after raising a new round:
- Building Unnecessary Product Bells and Whistles — Just as your core product begins to scale (hence the reason for more funds to fuel growth), ideas for new extensions of the product which have been dreamed of many months prior now become possible with new capital. The urge to move into these new areas is very strong. So often teams build out the platform way ahead of customer demand, and immediately after a new round is raised is when these new builds generally occur.
- Hiring Spree — Isn’t there always another person you can hire to do a job that needs to be done? Of course! But the discipline of no cash in the bank when you started kept you from superfluous HR budgets. Hire only what you need not what you want. The “growth scaling round” isn’t always that, and more money does not automatically give license to more people.
- Engaging Search Firms — But you will most likely be hiring new people, that goes without saying. It took so much time and effort to find the right people for the team in the early days, wouldn’t it be so nice to hire a search team to find you the BEST candidates out there? The amount of time you would save would easily justify the cost! Nothing against search firms (know many many great people in these jobs), but use them sparingly. I’ve watched many a team spend a fortune on search firms filling positions that don’t work out. And it’s not the search firms’ fault many times but the startup, because things are early and product changes and who knows what else. There is great focus that comes through the toil of finding the right people, and always keeping a list of possible people for future roles. In the earlier-stage cycles of a startup, most often everyone needs to juggle a host of jobs and responsibilities, so try to put off hiring specialized roles until you absolutely need them.
- Renting New Big Space — We’ve seen teams take cavernous space only to end up subleasing it out to other startups six months later because the growth never came. Clearly a team needs to move when they’re busting at the seams, and no one likes the moving process, but be careful not to go bigger than you need because this is not easily undone.
- Doling Out Big Salary Raises — What a heartless thing to say! Have you last checked how expensive it is to live in SF (or fill in blank)? Yes, I understand. But I’ve seen teams raise their salaries immediately only to cut them back four months later when the three pilots don’t turn out the way they expected. Interestingly enough, at the board level of our top management teams I have very little discussion with founding teams about salary. Why? With the best teams, you never have to talk about it. They are so focused on preserving cash and building a huge business that they don’t want to take big salaries. They understand that equity is what creates wealth, and these teams are far more concerned about properly incentivizing everyone with equity than paying out high salaries. Listen, I believe the laborer deserves his or her wages, but the teams that are always elbowing for more this or that are focused more on the short-term and less on the long-term.
It is human nature to be overly optimistic after a new round (or vc fund) is raised. When there is a lot of cash in the bank, the precision with one operated during less fruitful seasons can be forgotten. Immediately get the team together and ask yourself all the hard questions again to keep the company focused. Be extra cautious with all decisions in the months directly after raising capital — you won’t regret it.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
