Congrats On Your Startup Funding! Here’s How To Avoid Wasting It

Source: Fast Company, Michael Litt
Photo: dimdimich/iStock

One CEO says you can enlist everyone in your company to keep an eye on the budget even when you’re flush with cash and tempted to splurge.

After my company raised over $60 million in financing and passed the 200-employee mark, we faced an urge many other venture-backed startups do: the impulse to splurge.

The money Vidyard secured from our first round of fundraising went straight into building out new product lines. Since we’d built a great video platform for marketing teams, we figured we’d “rinse and repeat” by developing similar products for sales and customer support teams. But in hindsight, we were placing our core market at risk by diluting our focus on known income streams. It’s normal to want to chase something shiny and new than to grind away at solving a persistent problem–especially when you’re well financed.

An influx of investor capital can camouflage areas where you may not be getting adequate return on investment. Just look at the recent fall of consumer tech giant Jawbone, which raised nearly $1 billion in funding only to liquidate after its shift toward fitness trackers, starting in 2011, eventually went sideways. To be sure, the main reason for the company’s downfall wasn’t necessarily wasteful spending (legal battles with Fitbit surely didn’t help), but the point is that being flush with money is no guarantee of success. Indeed, it can even fling you into a financial death spiral that’s easy to miss until it’s too late.

So how do you actually keep a cap on spending when you’re swimming in cash? And in a way that doesn’t cause your entire workforce to resent how cheap you’re being? Here are a few techniques that worked for me.

INDUCE (A LITTLE) AUSTERITY
It sounds counterintuitive, but unlimited options are the enemy of creative problem-solving. Limits of time, space, scope, and–yes–money can boost creativity because they force you to use the resources you do have to their fullest potential. And it’s resourcefulness, not resources, that may be more likely to set you up for success in the long run.

I’ve seen how putting the brakes on a hiring spree–or even keeping the budget flat while upping expectations–can be a powerful way to keep a team focused and creative. “Austerity” isn’t necessarily about tightening your belt and making painful cuts when you don’t actually need to. It’s just a mind-set that keeps you from changing everything you do (including what you do well) the moment your means change.

OPEN THE BOOKS
A lot of companies say they’re transparent, but we share details that would make most CFOs flinch. From burn rate to headcount plans, it’s all made public to our entire team. Not only that, but we make sure everyone understands what it all means–our onboarding process even includes training on how to read the budget and how it relates to our core value of being relentlessly resourceful. I’ve found that when people understand the financials, they’re more likely to respect–and spend–the company’s money as though it’s their own. Knowing that everyone is on the same page also means I can hold them accountable to keep spending in check.

SET RULES FOR SPENDING, AND STICK TO THEM
Every business is different. Some burn massive amounts of cash before ever making any money, like Amazon, which only recently started turning a profit. Others break even early on. Either way, you need a path to profitability, and for that a rule of thumb is key. Without one, you’re essentially flying blind. There are plenty of formulas out there for startups to adopt while they scale up, from the “Rule of 40” to CLV:CAC ratios. At Vidyard, we follow the Bessemer Venture Partners efficiency score, which focuses on net new revenue, as measured against burn. This allows us to plan for an effective use of our funds and benchmark ourselves against best-in-class businesses in our sector.

HIRE AN IRON-WILLED CFO
(You knew this was coming, didn’t you?) Our CFO Matt Hodgson has a nickname: we call him: “the House of No.” Every single person on our team knows that if you go asking him for a big spend, you’d better have a compelling business case. This sounds common sense but can be rare at ambitious startups that raise a lot of money, where a growth-at-all-costs attitude leads to lax fiscal oversight. Matt always takes the time to walk through a request and determine whether the problem can be solved by changing a process rather than throwing money at the issue. Knowing the difference between an operational problem and a budget problem can save millions.

WHEN TO SPEND
Of course, there are times when it’s smart to put that financing to good use. Personally, I think the most valuable investment you can make as a growing company is in your people and culture. Investing in those areas is crucial for keeping your team engaged and focused even as it grows.

Still, there are a few sacred areas I won’t cut, no matter what. These may seem trivial or fluffy from the outside. They’re not. For example, an in-house catering program for more than 200 people might sound extravagant, but we feed everyone on our team lunch, every day. The price tag is significant but the payoff–cross-pollination between departments and strong cultural alignment–is invaluable.

Similarly, our annual company kickoff is one of the biggest expenses of the year. We bring the whole company together and spring for hotels, travel, food, venue rental (last year we had it in an airport hangar), and entertainment. When you have remote staff spread out across the continent, opportunities to converge are rare, and incredibly valuable. If you want cohesion around your strategy, vision, and goals, you also need social cohesion in your company.

From social network Yik Yak to foodie darling Maple, recent history is littered with startups that burned bright and then burned out. It’s easy to get caught up in the urge to flash your cash, so a little restraint in the right areas–and some spending in others–can actually be the surest path to long-term growth.

ABOUT THE AUTHOR
Michael Litt is cofounder and CEO of the video marketing platform Vidyard. Follow him on Twitter at @michaellitt.

https://www.fastcompany.com/40505569/congrats-on-your-startup-funding-heres-how-to-avoid-wasting-it