How many bean bags should you buy from your investor’s money?
I asked Mukund Mohan, who has raised funding multiple times and he says, "When the entrepreneur needed the investment, they committed to certain metrics. All money raised should be towards hitting those metrics, being frugal. Frugal does not mean skimp on resources, it means skimp on the nice to haves. Bean bags and Xboxes are nice to haves."
A case in point over here is that Indian startups are rather conservative by nature, primarily because funding is hard to come by. Raising a series A in India can be considered equivalent to raising a series C in the US! The amount of work that goes into raising fund, compels the startup to use it frugally. But the likes of Google inclines a startup to have a cool workplace; the lure is always there and one might sometiems get steered away a bit too early. But it is of utmost importance to be prudent. Whenever a company gets funded, the primary intention is to expand. Now, which are the key areas where a startup would utilize its funds?
- The biggest spend is always the payroll. In some cases more than 60% of the amount is used up in paying the new employees.
- Office space and infrastructure; depending on how frugal the founders are, this cost can have a huge spending range.
- Legal and Finance Fees
- Hardware and Software Licenses
Apart from these major compartments, costs can come from unknown waters but you have no control over it. Talking about the areas on which you have control, a startup that doesn't want to be named said, "We setup our entire office with furniture which was liquidated post a BPO closure. We got some high quality furniture, dirt cheap!" Looking out for such options and keeping an eye open can go a long way in sustaining your startup and giving it a better chance. Kulin Shah who is currently the co-founder at Wishberg, has been an investor in his previous avatar and says, "Quality of work, the culture of the company should be the prime motivator for people to join a venture. Not fancy office environment."
Elaborating on the correct way to spend this money, Vijay Anand gives his opinion, "The other way to look at it is to focus primarily on revenue expenditure - anything that would give momentum and velocity - read revenue, customers - not still be proving hypothesis (it maybe reserve 10-15% of the budget, no more for that). Marketing, sales, branding is fine. The main cost to watch out for is salaries, and in ensuring that you don't stack up your monthly burns too much. Most funded startups overspend on hires and then let go if the follow up doesnt happen. Its a hard hit on morale when that happens." Giving an analogy, he continues, "Think of venture capital as rocket fuel, credit card interest rate capital that comes at 20% interest a year. You have no excuse to be spending it on anything that isn't at least growing value at that rate." There are exceptions but these can be looked upon as general rules.
It all comes down finally to hiring smartly and choosing infrastructure with prudence. A few seemingly important decision like shifting to a better connected city, and even inside a city; staying in a suburb and keeping rents low or having a presence in the heart of the city with it's own advantages. The questions are numerous but many a times, that extra employee or that extra bean bag might be what could pull you down.