July 5, 2016 | 7-minute read (1367 words)
We talk a lot about preparing your startup for fundraising, but eventually you are going to nail the pitch and land your first investors. That's awesome!
We recently sat down with E.B. Shonnard, VP Product at Distillery (formerly WeezLabs) to get into the details of post-funding operations within a startup. E.B. and EGFS Consultant CFO Alaa Ismail discuss next steps from both the development and financial perspectives - painting a clearer picture of what is ahead of you once funding is secured.
A recording is below, along with a recap of the higher points of the discussion.
Congratulations on the funding. Now the pressure really begins to rise...
PROCESSES AND PLANNING
From the development side, it's important to document and test your assumptions. You start to get really strong opinions about what should be done when and why, but trying to keep an objective view of what those things are going to accomplish is really important at this stage. Different methodologies for development can mean different things to different people; so while it may seem that you sort of assembled some parts of your team and this is a period of real growth, it's important to come back to your team and make sure that you really decided on on where you want to start with your development methodology and what that really means for everyone.
For accounting, you need to maintain a proper set of books. Prior to funding it may not have been necessary to have current and accurate financials, but it becomes more and more critical as your company is growing. Moving from cash accounting to GAAP acocunting is key. GAAP accounting is a much better tool for running your business because it aligns any revenue with expenses in the proper time frames and it allows you also to do a much better forecasting process. Also, a financial forecast is essential now that you have money. The forecast gives you the the financial roadmap on where you are going and aligns your operational goals with the related numbers. Finally, how long is this new funding going to take you? What is your cash run runway?
REVIEWING THE MARKET
This is a really good time to regroup and review the market, because it does change. A really important point here is the projected growth - so what buyer personas and market segments do you project growth coming from? Another important piece about the market is a lot of people can start to get really focused on competitors...they want to make sure that they are matching features. Because you want to make sure that your product has everything that a competitor has, but in reality you should be looking at your specific users and addressing their needs better than any competitor. It's important to know the competitors that are out there and and be able to understand what they're doing, but it is critical that you limit how reactionary you are to that and keep trust in yourself and focus on your own users and making sure are you sure you are solving their problems in the way that you know is best.
TAKING STOCK OF THE CURRENT SITUATION
At this point it can be just as important to delete features or to modify them as it is to adding new ones. It can be really hard to justify internally again because at this point you probably have a backlog that is huge, long and from many different perspectives. Everything can seem really important and critical to get done quickly, so it's essential not only to prioritize adding new features but also to evaluate how the existing features are performing.
From the financial point of view, one of the biggest pivot points when you raise money is a decision that you as a company have to make - do you dig deep into your current install base and make them successful, or do you want to go out and and expand your install base if you have customers? That is a decision that a lot of management teams face. You're only going to last as long as your cash allows you, so at this point forecasting and aligning your product and your operational goals to your financial goals with the proper forecast becomes really crucial. Another key component is t keeping current with all of your tax filings - you do NOT want any surprises that you will have to take in front of the board. Stay on top of your corporate governance.
BUILD A ROADMAP AND PRIORITIZE
Get really clear on what your goals are. It's very easy early on to think product goals and company goals are one in the same. It may behoove you to have a strategy session with an external advisor to really break down the business and come out with an understanding of what you want to achieve on the business side, from there prioritize your road map based on what what features and what work needs to get done in order to achieve those goals. Once you become clear on the business goals you want to achieve and then lining those to product goals it becomes much easier to manage everything and keep the team aligned.
Something very key for early stage companies is the bottom-up forecast. You face many operational and product related decisions. Once you have made those decisions it's time to essentially align operational goals with financial goals...once a company has received funding it's important to put in a bottom-up forecast. A good financial consultant can help you with that process and make sure the roadmap goes along with your product development. It becomes your scoreboard, because if you are doing your financials on a monthly basis a good forecast aligns with your financials. From there you are able to see where you were and then adjust to the forecast to be inline of where you are going.
SCALING THE TEAM & RESOURCES
On the question of hiring vs. outsourcing
There is no right answer for everyone on this, but things to keep in mind include how much original experience that you have already in the tech industry and building teams as well as what your runway dictates. Other things that you need to look out for are the level of team management and how well the team is communicating. It's a common pitfall to get an outsourced team and only checking with them once a week...which sometimes leads to results not being what was originally intended. If you are looking for an outsourced team, make sure to find a team that has a project manager attached that can be a proper liason between you and the team. Heiring an in-house team off the bat can take time to get up to speed - running together quickly can take a bit of time and management.
When you are deciding on hiring during the growth phase of your business, one of the things that you will need to be aware of is any pre-funding stock options that you issued. Do you have a real process in place? One of the requirements that people forget about is the 409a Valuation, which is required by the IRS. It essentially dictates that companies with stock option plans have an outside valuation that has to be done at least on an annual basis, and it could be more if if there are significant events that would affect the evaluation up or down within that 12 months.
Do Your Due Diligence
You also need to be on top of your due diligence. Make sure that your legal agreements are are maintained ,cap tables are current and accurate, any critical agreements that you have with customers are documented, board meeting minutes are logged, and that you have an HR process in place.
Finally, it's crucial to keep everyone aligned with the overall vision of the company. For management, part of this includes working together from both the development and financial sides to make any realistic adjustments needed while keeping aware of the forecasts.