Funding is simply a step in the startup journey
Most Failed Startups Make This Same Single Mistake
One of the surest ways for a startup to make headlines is to pull in a huge round of funding from investors. This is especially true in Silicon Valley, where it’s not uncommon for tech startups to secure hundreds of millions of dollars to catapult their ventures to the next level.
However, there have been numerous cautionary tales of businesses that celebrated their lucrative fundraising efforts by over-confidently spending money as quickly as possible. Perhaps the most notable recent example is We Work, which responded to a two billion dollar fundraising round by raising spending and self-dealing by leasing property to itself.
Ask yourself, when was the last time you saw a company celebrating the fact that it has borrowed money? Raising capital really isn’t any different and it shouldn’t be a cause for a fancy celebration or an enormous spending spree. Instead, it should be viewed as a key inflection point in a startup’s journey.
Companies that do raise money need to remain humble and resourceful and keep these important guidelines in mind.
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Remember your promises and where you came from
Startup leaders tend to be passionate and idealistic, and as a result they can attempt to captivate investors with promises of exponential growth, game-changing products, or other lavish guarantees. Impressing investors is difficult for even the most talented CEOs, and it’s a common impulse to paint the most promising possible picture of the company’s future to win over future backers.
It’s not necessarily a problem to make big promises to investors. However, the worst thing a startup can do is overpromise and under-deliver. Often the best way a leader can respond to a strong round of fundraising is to keep their team laser focused on building the vision they’ve sold to investors.
While securing funding should be considered an accomplishment, the worst thing a business can do is respond to that win by getting complacent and losing the discipline that got them there in the first place.
Keep a long-term orientation
A key responsibility of a startup leader is focusing on the long-term direction of the business. While it isn’t always fun, that sometimes means pushing aside the short-term wins and day-to-day operations of the company and keeping the five and 10-year goals front of mind.
Part of why We Work’s Neumann struggled as CEO was that he was not focused building toward a profitable and sustainable future for his company. While funding allowed employees to enjoy short-term perks like lavish company retreats and a “fun” company culture, there was a clear lack of focus on creating an achievable, fiscally solvent vision for the business. That failure rests squarely on the leader of the organization.
Getting funding is not the end goal for any business; funding needs to be used to build a sustainable long-term future.
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Be accountable for your spending
A mistake many companies make is spending irresponsibly and disproportionately after receiving funding. It can be easy to believe that a massive amount of money will never run out–this is the same reason lottery winners go broke at a higher rate than the average person.
Many startups reach their early stage of success by being careful with spending, making smart decisions, cutting costs when possible and holding people accountable when they exceed budgets. These are not disciplines that should be tossed aside once there is some money in the bank. That money will need to be repaid in one form or another down the line.
This doesn’t mean businesses shouldn’t use raised funds to take carefully considered risks. Spending a large amount of capital to develop a product or hire more people can be the types of decisions that will drive future growth and are the reasons behind the investment thesis.
However, leaders must make sure their teams don’t use funding as justification to take needless gambles, over-budget on initiatives or recklessly spend on unnecessary perks. Financial accountability is always important, no matter how much money is in the bank.
Earning funding is a pivotal milestone for every startup. However, it is what leaders do next that will determine the long-term solvency of their organizations. Startup leaders must keep the future in mind, be mindful of costs whenever possible, and push their teams to deliver that bright future with discipline and focus.