For founders, taking funding is about more than adding working capital — it acts as a catalyst for things to come. It provides a third-party validation that attracts the interest of media, customers, and potential executives you want to hire.
Before taking funding, however, you have to know if you’re ready to light that fire. More importantly, founders need to have a specific plan for what to do with all that cash because too often, startups go guns blazing after a Series A just because it’s the logical next step. Here are several questions to consider before your big payday.
Why does it matter to use VC funding for a specific purpose?
When you accept VC funding, you don’t necessarily have to know exactly what you’ll use it for, but you need to have a clear understanding of your No. 1 goal for the immediate future – what’s most important right now – and how funding can help you reach it. Capital infusion should be the accelerant your company needs to reach the next milestone in a broader strategy.
In the case of my company, Pluralsight, we waited until we had figured out our product, revenue model, and customers before accepting outside financing. After nearly a decade of bootstrapping, we knew we needed to rapidly expand our training library and build out new areas of content (namely IT administration and open source software development).
The market for online training was becoming fragmented, and we knew that consolidation was the best way to achieve a dominant market position quickly, and one built to last. Following our $27.5 million Series A at the start of 2013, we emerged from a decade of stealth in dramatic fashion by acquiring some of our biggest competitors over the course of three months. Taking the market by storm was all part of our broader strategy.
What are the risks of not having a concrete plan?
Investors hold you accountable for how you spend their money, so you have to make sure there is clear value and measurable ROI. If you do not have a plan, you risk: a) getting distracted from your No. 1 goal and allocating resources toward endeavors that won’t help you achieve it, thereby losing credibility; b) making it harder to sell your position in the marketplace and also internally (among staff) by not having clearly defined operating objectives; and c) sitting on the funding for too long and missing out on key strategic opportunities (e.g., if you’re looking to acquire a company, you can be sure someone else is as well).
What leads founders to take an investment too early or without a plan?
Funding now seems like a rite of passage for every startup, but don’t forget that you’re giving up some control of your company and diluting your ownership. When you’ve built your company organically, don’t give away your hard-earned equity without a higher purpose in mind. I think we all know one or two entrepreneurs who were swooned by a big-shot angel investor or VC firm and gave up too much of their company for too little. Every piece of your company that you give up should be carefully weighed and considered against the bigger picture you hope to achieve.
This is not something you want to rush through. Make the process as competitive as possible, and meet with as many investors as you can. If you’re fortunate enough to have many offers, take some time to vet the companies and get to know the leadership team on a personal level. When it came down to which offer we accepted, most of the terms were quite similar, but we ended up picking a firm because we connected with a partner who fit into our culture, understood what was most important to our business, and could add real value. It was that personal trust we established with individuals that ultimately sealed the deal.
Do founders need to prove their business model can be profitable before taking funding?
Ultimately, this question can be answered by how much control you hope to retain in your company. The stronger your revenue model, the more trust your investors will have in you and your management team – and the more autonomy they’ll give you. If you haven’t yet proven your business model, or if you’re losing revenue, you can bet investors will insert themselves a lot more in the day-to-day operations and decisions of your company, especially if they have a controlling interest.
What are some things founders overlook when looking for outside investment?
You absolutely must have buy-in from all stakeholders before accepting the investment. At Pluralsight, we had not even considered taking funding until VCs started initiating the conversation. Our founders mulled it over for a short amount of time and then we went on a hiking trip to Nepal completely unrelated to work. While hiking, we talked about our vision for the company, and by the time we came down the mountain, we’d decided as a group that taking funding was the right thing to do. It sounds like some great epiphany, but the trip was practical in a lot of ways. Giving ourselves time away from the day-to-day of the office to gain some clarity and think about the company from a big-picture standpoint was just what we needed.
In addition, ensure you have a hiring plan in place. If you don’t already have a fully fleshed out executive team ahead of the funding round, one of the first things your investor(s) will require is that you build one out, especially finding a CFO. This can be a grueling process but one that you should take seriously and not rush. It’s essential that you find exec members who will work well together, bring unique talents and perspectives to the table and, most importantly, believe in the purpose, culture and direction of the company.
Taking funding too soon can cause companies to fail, or at least get distracted from their founding vision, so get your ducks in a row beforehand. Your employees, your investors, and your sanity will all be thankful you did.
Aaron Skonnard is CEO of Pluralsight, which provides online training for technology professionals.
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