Why the Day After is Critical
Savvy Founder/CEOs know that cash is the lifeline of any startup working tirelessly to fund product development (or completion) and bring it to the marketplace. Yet even the most knowledgeable entrepreneurs can fall prey to the pitfalls of what to do after they’ve raised capital. Spending indiscriminately, scaling up too quickly or adopting a gun-shy approach to deploying necessary expenditures are all common missteps we see at Nucleus. Critical to maximizing outcomes the “day after” a capital investment event for any firm hoping to solve a marketplace need is a well-thought-out strategy for using that capital wisely, employing fiscal discipline and, of course, a focused go-to market strategy for generating revenues.
After spending significant and critical time developing a pitch book, meeting prospective investors and then ultimately raising capital, misuse of those successes is a crushing disappointment to everyone with monetary and personal skin in the game.
Companies like WeWork stand out in the marketplace as exemplifiers of strategies to avoid. However, there are many smaller and less visible firms that face unfortunate outcomes as a result of poorly managed next steps.
Take Company A, for example, a contemporary data and analytics platform that built unique proprietary software. Several large corporations were highly interested in leveraging the technology for efficiency and growth. The Founder/CEO came with great credentials. The company had raised money over the years and finally raised enough capital to last two years without securing any further funds. Near-term product traction was promising. It felt like the company had unlimited resources. Unfortunately, the CEO acted like they had unlimited resources. Within a few months they spent most of the money on hiring development staff to build the “best” product, but never focused on product market fit. Before they knew it, they were out looking to raise capital again, facing an unfavorable audience who knew they’d burnt through resources too soon. Company A ultimately failed.
Company B, another software developer, was well capitalized and had raised significant funding from sophisticated individuals with well-connected market access and domain knowledge. Finally, they raised Series A level institutional money, providing access to adequate capital and an active pipeline of clients. The company went on a hiring spree, developing multiple products and experimenting with different markets. However, their primary product market fit was still not fully developed. By the time they solved for that, they realized the sales cycle was significantly longer than expected. Company B soon ran out of money after wasting valuable resources, time and momentum. They should have focused on product market fit and business strategy before engaging on multiple product offerings. The firm was acquired by a competitor for a fraction of its value.
Company C raised initial seed capital from well-versed investors but was afraid to deploy those funds to accelerate sales momentum. They already had a product market fit and large brand name clients, but were reluctant to raise additional funds. Instead they relied on the founder to self-fund any short-term deficiencies and did not invest in adequate marketing initiatives. Company C should have raised additional capital to fuel sales growth and invested in a marketing/branding exercise to help accelerate the momentum they were having. Instead, the company failed to achieve its growth potential and floundered.
In all these cases and many others we have come across at Nucleus, Founder/CEOs and boards make critical mistakes that change the trajectory of would-be positive outcomes. Disappointment subsequently follows among stakeholders, investors, founders, current and prospective clients and, most importantly, their own employees. What can these firms do differently?
One of the key points we stress to startup and growth firms is the very basic tenet that cash is your lifeline; if you have more cash coming in than going out you can last for a long time. Too many Founder/CEOs overly focus on raising capital to the detriment of running and growing their business.
Our advice: Secure enough capital and generate sufficient cash flow to focus on running your business through the next key corporate milestone, such as reaching a key product goal, achieving certain ARR momentum, hiring a team, or diversifying markets, etc. (Usually 2-3 years.) Growth will follow. Below are some strategies to help you get there.
Tie Spending to (Focused) Outcomes
Operate in a mindset of scarcity – within reason, of course. Many founders start out this way, especially after having bootstrapped their firm and taken a significant reduction in pay to develop a business they are very passionate about. Then after raising significant capital, those same entrepreneurs temporarily lose the scarcity mindset and start acting like they have unlimited resources. This is a critical mistake. Spending must be tied to outcomes. Demonstrating fiscal discipline to clients will help generate cash flow, preserve capital, and maximize the potential of raising additional funds later.
Institutionalize Checks and Balances
Create internal checks and balances on all fiscal resources and their uses. Begin with a clear budget and assign a board member or CFO the responsibility for overseeing follow-through on financials. This task must include calibrating cash outflows to business outcomes such as sales or product milestones.
Treat Client Consulting Services Revenue as Capital
Warm up to the idea of generating services revenue in addition to product revenue despite its more limited capacity to add valuation. Especially in enterprise software sales, your product will need onboarding and customization. CEOs often forget that revenue from services is among the best sources of capital; it both funds the firm and simultaneously validates the business by catering to clients’ product implementation needs. Services can offer you a critical source of understanding the client base and their needs, while adding traction to the product you are selling by helping clients onboard the product.
Successful firms that raise capital and use it wisely are far more likely to succeed. The most successful operations continually manage with fiscal discipline, calibrate investments to outcomes and ultimately understand that their job is not to simply raise capital but to solve a problem for the marketplace. The best indicator of that is, as always, generating revenues.
ABOUT THE AUTHOR
Jayesh Punater is a successful Entrepreneur, Investor, Fintech Strategist and Thought Leader. He focuses on bringing innovative technology and business models to the FinTech industry. Mr. Punater is the Founder and CEO of Nucleus, a FinTech studio and venture investment platform. Nucleus invests in, advises and provides services to start-up and advanced stage firms.
Besides Nucleus, he is an advisor to Mission OG, a finance and technology venture fund, he sits on the Advisory Board of Adaptive Management, an alternative data marketplace as well as an analytics tool to help make better investment decisions. He also is a member of the Advisory Board of Thales, a technology-based brokerage firm, a member of the Advisory Board of Bridge FT, a wealth management software platform, Board Member of Life Plugin, which is a personal growth platform for entrepreneurs, a member of the Economic Club of NY, a member of Mavericks 1000 an impact entrepreneurship organization, member of Mind Valley University and a member of C2Cwhich is a peer CEO organization in New York City.
Previously, Mr. Punater founded Gravitas, a leading technology services platform servicing the Asset Management industry. As Founder and CEO, he organically grew the business to a global firm with 300+ employees, with clients managing more than $1.2 Trillion in AUM. Gravitas was sold to a European listed company in 2017.
Jayesh is a strategist and focused on growing companies and has had roles in market facing functions – always looking to adapt innovative ideas to practical business problems –focused on helping firms grow their business or generate alpha or achieve operating efficiencies in the operations of the firm.
Mr. Punater is a graduate of Arizona State University with a BSEE and a minor in Economics. He has attended Executive Education courses at Harvard University, Stanford School of Business, Wharton, Columbia University, Northwestern University and has taught an entrepreneurship MBA class at Fordham University as an industry CEO.
He enjoys traveling, exploring different cuisines, and practicing mindfulness and visualization. He also likes to swim, run and play golf in addition to chess.
