Raising funds is one of the biggest milestones in the journey of a start up. From hundreds and thousands of new ideas, new teams, and new business models, less than a quarter are able to get support at the seed stage, and perhaps less than 5 percent end up with funding from institutional funds — VCs or angel networks.
But if funding is difficult, managing the company post funding is perhaps even more difficult. It's like how we often used to joke at IIMB: only after joining did we realise that getting in was the easy part; surviving the two years in one of the most brutally competitive environments was the tough part no one warned us about. Also, less than 15 percent of this elite group ends up with placements of their expectations. Start ups are no different.
Once the funding is received by a start up, the real race begins. And it's a race with constant uncertainty, with a lot of competing priorities. Here are a few common challenges in this journey:
- Process versus innovation and product development
The underlying premise of most startups is their ability to 'disrupt' the market through building innovative product and/or service. But once the startup has started product, clients / customers expect consistency in delivery. Also, at some point, unit economics (that is, margin generated from each sale) has to start making sense. This requires standardisation, and conflicts with the need for the startup to remain innovative and do constant product innovation.
Though the answer to this conundrum is dependent on the nature of the startup, having a clear roadmap of rolling out product versions will help balance the two.
- Personal visibility versus business success
This issue has moved up my priority list. Startups are in vogue, leading to a lot of visibility in the media and events. Startup founders who are able to raise funds become heroes in their own right, and it's easy to get carried away and get busy giving interviews, giving lectures at events, and writing blog posts. The real success of a founder is not about how many followers he/she has on social media and events, but how robust the growth of his/her own venture is. Visibility can be great for the business, as long as it does not become a distraction from the core activities. Also, visibility is much more important in consumer-facing businesses. When a startup building a hardcore B2B industrial application justifies his enormous time delivering talks and social media, something is amiss.
- Next fundraise
Growth will most likely require multiple rounds of funding, and when to raise the next round is an important question. Typically, the Series A round will require demonstrating clear proof-of-concept and revenue traction indicating the ability to scale. Many times, growth plans face unexpected challenges, requiring further fine-tuning of business model or product, and may need more bridge funding before hitting the big circuit. One possible way to address this is to keep in touch with VCs and constantly look for their (honest) feedback on what else needs to be done by the startup.
Once again, fundraising occupies a big mind space for founders, and keeping one focused on building the business is a must while spending time on talking to VCs.
- Financial diligence and investor trust
After sales growth and product quality, an investor's biggest concern, whether he says this explicitly or not, is financial diligence and the integrity of the founding team. Some founding teams have very young professionals, with barely any experience in running an independent organisation/P&L. From infrastructure costs to hiring resources to negotiating contract terms, there are hundreds of mistakes founders can commit in using the funds. Even worse is when there is a possible leakage — high travel costs, hiring friends/relatives without the relevant experience with high salaries, questionable expenditures, etc. As humans we have an amazing ability to justify our actions through the convoluted logic of "it's what I thought was best for the company." This is when investor trust and market reputation start taking a beating, and because investors are very sensitive to such situations, sometimes even good intentions come under the scanner because they appear to be dubious.
The best way to avoid such situations is to have a very strong corporate governance structure, with clear guidelines and expectation setting with investors. In the excitement of funding, this is often boring, detail-oriented, uncomfortable work, but will make the lives of both investors and founders much easier as time passes.
- Corporate governance and compliance
Since startups are always in a race to do more in less time, whether for product development or in generating sales, it's common to ignore compliance and governance processes. We consider these activities as 'non-core' or 'old-school', but they are important nonetheless. Startups must make sure they have a solid CA/CS who keeps all compliance requirements addressed, and takes part in strategic discussions with the founders. It's also equally important to keep a track of progress, key decisions, and strategies on a monthly basis. Since the roadmap of a startup is constantly evolving, in six months one may forget why one had taken an earlier decision. Documenting and retaining a reference trail is important, and this is often missing in young startups without the experience of running companies before.
- Team building
The single most important activity for all startups while scaling up is building the team, but unfortunately it is the one that is most ignored by founders. Getting the first set of team members together, from two to three co-founders to a team of 10–15 is fine, but when one is growing from here to a team of 50–100, that's when the cracks start appearing. The first sets of employees are always those enchanted by the founders and the vision of the company, and join with passion and belief. However as the team expands, this passion gets diluted in the newer team members. The biggest challenge for founders then is how to build a culture where the passion and commitment to excel can trickle down all the way to the bottom. Many ventures plateau out not because of the dearth of opportunities, but because the value generated by the last employee who joined is very incremental.
A lot more can be written on each of these categories of challenges for funded startups; we are just scratching the surface here. But I hope that it helps funded startups plan their activities and priorities better. It's also best to have a robust panel of advisors or board members who can help startups through this journey of growth, and can act as brakes or gear-changers while the founders are busy accelerating
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)