Venture Capital Just Came in? How Not to Blow It
You’ve probably heard stories about how much money new tech companies burned through in the late 1990s. Once people realized that the internet was here to stay, and that anyone with a reasonably promising idea for a web startup stood to make some serious income, some venture capitalists were more generous with their investments than they’d been prior to email and Amazon and Yahoo(!). And they handed them out faster.
It seemed like there was a major IPO at least weekly. People left good jobs to take their chances on what was called a, “pre-IPO dot-com.” Problem was, some of the “reasonably promising ideas” simply weren’t. Or their development and launch (if the latter ever occurred) were mismanaged. Or the founders drained their bank accounts—the phrase “burn rate” came into being—too quickly.
You know how it all ended. The tech bubble burst.
Obviously, investors were a little gun-shy for several years. But Q1 2016 was the tenth consecutive quarter that venture capitalists invested $10 billion-plus in deals, according to the PwC/NVCA MoneyTree™ Report based on data from Thomson Reuters.
Some analysts and other experts believe we’re in another tech bubble now; others don’t, given venture capitalists’ investments over the last several years. Many of those who do predict that its bursting won’t be nearly as disastrous as the one at the beginning of this century.
Slow and Steady
If you’re one of the fortunate recipients of venture capital funds, you may feel less pressure to start turning a profit quickly than a company that must bring in enough revenue to at least cover expenses from day one.
You may also face a lot more temptation to spend money on unnecessary luxuries. Keep in mind that if your company goes under because of unwise financial decisions, you will have some explaining to do when you move on to the next chapter of your professional life.
Here are some suggestions that should please your investors and keep you from running out of the funds you received from them:
- Start a wish list. When you think about spending money on something that doesn’t have a direct path to your company’s well-being and chances of success, put it on a wish list. Divide the list into prices ranges and prioritize it. As you achieve milestones, consider rewarding yourself and/or your staff.
- Be an example. Minimize your own expenses if you expect the same from your team.
- Develop a strong, ongoing body of social content. This may seem like an odd way to minimize expenses. But establishing your group’s expertise in the area where you’re creating products or services can save money on marketing and promotions. Show prospects why they should trust you and your offerings.
- Hire independent contractors when you can. Hiring a lot of full-time employees that are under your supervision can be an ego-booster. Try not to fall for this. You’ll of course need exceptional talent from the start in order to succeed. If you hire remote workers, though, you’ll have a much larger pool of possibilities. You’ll save money on personnel costs. When you’ve established a strong revenue stream on your own, you can start measuring office space.
- Stay lean and nimble. Consider that your funding, your industry, your competition, and your target market may be in a state of flux at any given time. Proceed with your plans, but be prepared to pivot quickly if need be.
A Balancing Act
All of this is not to say that you shouldn’t spend the money you worked so hard to get. Venture capitalists believed in your dream enough to finance your fledgling operation, and they expect that you’ll use the funds they’ve supplied to become successful – and profitable. You’ll need to find a comfortable middle ground where you’re getting the resources you need without making unnecessary expenditures.
Any business that receives venture capital should have an ongoing professional relationship with a financial advisor. He or she can help you keep a close eye on your burn rate – and on every other element of your finances.