Make the Most of the Money Your Startup Raises
A lot of startups chase funding like a dog chasing a car — in that they wouldn’t know what to do with it when they caught it.
In all honesty, I would never try to tell a startup leader how to put their cash to work. You did all the hard work, so you deploy your capital in whatever way you see fit. But I know that for every startup that gets funded, there are thousands more who are trying and failing.
And I also know that one of the most frequent reasons investors reject these founders is the lack of a coherent plan for the money once it’s banked.
Those are the folks I want to talk to.
The Best Funding Plans Use the Four Ts
Now, I’m also not here to tell you why you should raise money — a few weeks ago I gave you a checklist to answer that question for yourself.
But if you’re going to start a fundraising cycle, or even if you’re just thinking about it, it’s more important than ever to be very clear and very concise about how that money will be applied to fuel your business growth.
Here’s a very simple way to set the expectations for how a venture investment will be spent, based on my own experience and verified by my VC and angel investor friends.
Time: How Much Runway Will You Add?
This is the first and most important metric for measuring the value of any new investment.
How long can you keep the doors open?
It’s a number you should be able to rattle off from the top of your head at any given moment.
The formula is easy enough: Cash on hand + expected revenue — burn rate, calculated every month until the investment goes to zero. Ideally, this is a curve that starts to descend sharply once you put the new money to work, flattens out while that work produces results, then ascends sharply on the back end as those results generate…