Closing your first VC round is a huge milestone for any start-up. Not only does it mean you have the funds to take your business to the next level, but bringing VCs onboard provides external recognition for your business model and growth prospects, plus additional support and contacts to help you scale.
Many founders also feel a sense of relief, having spent months or even years as “full-time fundraisers”, courting investors and going through due diligence processes. You can finally get back to your day job.
But in the relief and excitement of securing funding, founders should remember that the growth cycle of VC backed, early-stage start-ups can be intense, with most having a relatively short runway until their next raise – around 18 months between seed and Series A rounds.
Founders have to move fast and be focused to ensure they maximise their resources to achieve the greatest ROI and have sufficient progress to show subsequent investors.
There are a number of common pitfalls that can make that a lot more challenging.
#1 – Not hiring fast enough
With your first VC round on board, the pressure is on to move from product-market fit to rapid-growth, which means hiring and onboarding new team members, fast.
Recruitment can be a lengthy process, particularly for senior people and technical roles, where the right culture and skills fit are essential, so planning should start before your raise is finalised.
Many founders are too slow in getting this process moving, so waste valuable months advertising for roles and interviewing, that could have been spent on business growth. Wherever possible, look to line up senior people pre-funding, so that they can hit the ground running. And with other roles, be ready with a hiring strategy to expedite this process as soon as you’re ready to push the button.
‘Securing your first VC round is a fantastic achievement, but it sets you on a particular type of growth journey’
#2 – Over-hiring
That said, there are also cases where founders go overboard with hiring, which, if you bring in the wrong people, can be a huge drain of cash without much to show for it.
The key is to focus on senior hires initially, ensuring that any skills and competency gaps in the current team are filled.
Does the founder have strong operational support for growth? Rapid expansion can put a lot of strain on all areas of the business, so a strong COO is usually a good investment to keep everything running smoothly and avoid any customer service or regulatory issues.
A good CFO can also pay dividends, by providing financial controls and staying on top of cash flow. Poor bookkeeping, forecasting and cashflow management can easily ruin a growing business.
Don’t let recruitment costs run out of control either and be smart about hiring. Agencies are good for certain roles, but a direct founder pitch is often more effective.
And be open-minded about geography and location; the last 12 months have shown us that a team can work effectively from anywhere, so don’t limit yourself to just hiring in your local area.
#3 – Ramping up fixed operating costs
Also be really careful about ramping up overheads or spending on unnecessary luxuries now that you’ve got some cash in the bank. We’ve all seen start-ups move to a swanky office or splash out on staff benefits after a VC round, and while things like this may aid recruitment and employee engagement in the long-term, they aren’t a priority for growth right now.
Wherever possible, try to find more cost-effective alternatives that will achieve the same, or similar results that won’t drain your funds so quickly.
With the rise in distributed working, do you need a large, central office space, for example?
The same goes for PR, which can become a big focus for some founders after a funding round. By all means enjoy the moment to achieve some positive media hits, but that doesn’t have to mean shelling out for a costly PR agency.
#4 – Switching off your fundraiser mindset
It might be tempting to think that you don’t need to worry about fundraising for another year or so, but in reality, work on your next funding round should start shortly after completion of the previous one.
You don’t need to proactively pitch the business at this stage but appointing a fundraiser-focused head of investor relations will enable you to build relationships with potential lead investors for a follow-on round, as well as growth partners.
VCs live in deal cycles, so it is helpful for them to know in advance when you’re likely to be raising your next round and doing this gives you a head-start for when the time comes. For fast-growth startups, investor relations should become a permanent fixture of the business.
#5 – Treating VC partners as just the money
Some founders can be suspicious of VCs at first, or see us purely as money providers, which means they miss out on valuable support.
One of our founders took close to a year to feel comfortable talking to us about issues in the business, trying to pretend everything was perfect when it wasn’t.
VCs understand that start-ups will face problems and crises, that’s the nature of the business.
For the relationship to work, you have to operate as a team, get along and fundamentally respect and trust each other. Otherwise having difficult conversations and making tough decisions becomes even harder – increasing stress levels and stifling the business.
So, start as you mean to go on by having open, honest conversations about expectations, concerns and ways of working together.
#6 – Setting unrealistic budget targets
That includes being realistic and transparent about the numbers, whether that’s budget targets or growth forecasts. While it’s understandable that founders want to be ambitious about their plans, setting unrealistic figures undermines trust, and sets you on the path of chasing targets which don’t make sense for the business. It is far better to be upfront and transparent about plans and potential issues from the word go. Plus, nothing is better for team confidence, morale and board support than beating forecasts.
Securing your first VC round is a fantastic achievement, but it sets you and your business on a particular type of growth journey. The VC route doesn’t suit all founders, nor all businesses; you have to be extremely motivated, resilient and single-minded about building and scaling a market-leading business. How you put your first VC round to work is your first big test. Get it right and it puts you in a strong position for confronting the many challenges ahead.
Denis Shafranik is a partner and co-founder at early stage venture capital firm Concentric