September 18th, 2017
Entrepreneurs are usually talented, persistent, confident and innovative. I am still puzzled sometimes why they rather embark on a journey towards the unknown, forfeiting their job security and great pay.
Moreover, the CEOs in startups are driven by conviction and share that charismatic, positive approach that gets them through the daily challenges. This “drive” and “super-star” capability may create a reality distortion, preventing them from making necessary corrective actions to their product, company and self.
The startup CEOs may come from different backgrounds, they could be amazing technologists, product or sales people, but not all of them possess the experience required to optimally manage their company. Some will grow to learn how to run a successful company, some will do their best but won’t be able to scale.
In this series of posts I’ll do my best to provide practical tips / perspectives targeting the startup’s CEO, so let’s start with the driving force of any company. Cash.
Cash will dictate your velocity, your ability to grow and sustain constant required changes. Cash will dictate the type of team and affordable decisions span, and if cash runs out it will surely end your company.
On the other hand if you ask for too much too early, you will impact the company’s valuation, dilution and risk future down-rounds. More importantly you may fall short as your product / company maturity will not allow you to meet the goals and expectations you’ve set.
I was once asked by another entrepreneur “As the CEO, do you have the funds to do what you know needs to be done, or do you manage with what you can afford?” a teasing question but still a good one..
Raising funds is complicated, it’s about being able to articulate yourself, team, product and your vision in a convincing way and it has a lot to do with timing. So when you decide the timing is right (which could be a topic for another post on its own) you need to pin down the right collateral and decide upon the optimal amount of funds.
So how do you define the right amount / timing / compelling event etc..?
Simple! You put a plan together.
The (business) plan should cover your annual P&L, three to five years ahead. You must generate consistency between your marketing-sales funnel conversion, income stream and associated costs. Your HR costs should be carefully scheduled as they enable the funnel performance. (Cover both cash-flow and EBITDA recognition separately).
The best business models can be told as a story, “cause and affect” driven, for example if we need to generate 1000 leads at the “top of the sales funnel”, you need to carefully associate and schedule the marketing people / resources that would generate those 1000 happen.
If you have a SaaS business try to stick to the industry KPIs but for your own sake don’t be overly optimistic (for example using CAC ratio figures that mature companies reach after a half a decade)
The plan should be aligned with the company’s goals because even if you are committed and measured upon growth, having your cash depleted before you meet the next funding milestone leaves you in a major disadvantage.
Set clear funding mile-stones in your plan, make sure you allow at least 8 month of positive cash-flow balance when you set-off for your next round
Last but not least your plan should reflect your risk management approach, Marketing and Sales people for example, if you plan to recruit only a single marketing / sales person most chances are that they will not meet their goals on time, so you can for example recruit two marketing professionals and reduce the risk of not meeting the top of the funnel figures. On the other hand don’t get a large sales team on board before your marketing generates sufficient leads to feed the sales team.
Know where every penny is targeted and make sure you track your plan vs. actuals on a monthly basis and validate the integrity of your assumptions (funnel conversion, income and expense)
Now you’re ready, and as reality is stronger than any plan, you have a baseline and common articulation to support decision making and expectations with both your investors and with yourself.