Startup Guide, Part 6: Too Little Investment - How Much? And too much?
Part 5
In this article I will answer the questions:
Too little investment - how much?
Too much investment - how much?
How to calculate the required amount and what can be done about it?
')
The first question is how much investment a startup needs . The answer must be sought in my theory of two life stages of a startup - before entering the market and after. Prior to launching, a startup needs to raise investments at least to enter the market. After the release, ideally you need so much investment so that you can use all the opportunities that have opened up, and then go to self-sufficiency, still using these opportunities.
Then I will show that “at a minimum” means such a quantity of money that exceeds what you plan to spend - so that you can cope with unpleasant surprises. In other words - insurance. This is especially true for start-ups that have not entered the market, because it is very difficult for them to figure out when this exit will happen. All this sounds obvious, but in my experience, surprisingly many startups are trying to attract investment, poorly representing the amount of money they need, and also what specific goals they will take.
Obviously, many startups are finding out that they are not being given so much money - but you still need to have a good plan for spending money so that you can navigate the situation.
If you have not yet entered the market , and you are not able to raise investments for an exit, then you need to move as far as possible with the funds received, and in the next round of the search, show progress towards the market.
If you have already entered the market , and you are not able to find money for all the opportunities opened up before you - most likely in the development process you will see that it will be easier to find new investments than before.
It can be said that if you receive money in smaller portions (before or after entering the market), then it will be easier for you to raise investments in the future, they will cost less and you will have to give a smaller percentage of the company. That is why some entrepreneurs decide not to chase after large investments. But I do not recommend this.
What could be the consequences of not getting enough money? You jeopardize the existence of the entire company.
1) You, most likely, do not foresee all obstacles for business. The product will not be released on time, there will be sudden quality problems, one of the main customers will go bankrupt, a new serious competitor will appear, you will be sued because of the use of proprietary technologies, you will lose a key engineer ...
2) Opportunities to receive funding in the future may not be. Sometimes investors are enthusiastic and finance new ventures, and sometimes not. When the window of opportunity closes, it is very difficult to convince them, especially in a volatile market situation. Those who start up in 2001-2003, understand perfectly what I am talking about.
3) Something completely unexpected and unpleasant can happen. Terrorism, diseases, war in the Middle East, North Korea launches a nuclear warhead rocket, giant meteorites ... Such incidents will not only close the window, they will keep it in such a state for a very long time.
Funny: a lot of business models from the Internet of the 90s, which at that time looked silly, work fine. And now there are a decent number of startups hailing from the late 90s, still working. OpenTable (planning to go public), TellMe (Microsoft sold for $ 800 million), Opsware (my company) - would go bankrupt if we had not forged money while it was hot; and received $ 100 million in profit for the year, and its current market value is about a billion. So the difference between start-ups from the 90s who have survived until today and those who did not live is that the first ones raised tons of money while they could do it.
In general, the more the better. Only without the transfer of control over the company and without madness. Too aggressive entrepreneurs who try not to get too much investment in the hope of easily getting it in the future put the whole company on top, in addition to all the usual risks of startups.
Suppose you raised a lot of money and go great. You will be satisfied, even if you do not earn as much money as you could if you played this "roulette". And imagine that you did not raise enough money and you backfired. You lose the company and very sad about it. Is it worth it?
There is one more problem when you get a big investment, but this problem is important for everyone in different ways. Debt repayment. If you want to buy your company, the more money you received from investors, the more expensive you have to sell the company so that the difference in prices is substantial. That is, too large investments may hinder the future sale of the company. If you are sure that you will be bought, while not for a very large amount, then you should not get too large investments, simply in the financial sense. But this strategy has many other risks.
Taking all this into account, in normal situations, making large investments makes more sense, because then you are safe from surprises — and this is more important than worrying about blurring control or debt payments.
There are drawbacks to investing too much. I already mentioned two - blur control and too high a price for a potential sale. But a very big minus in big money is cultural decay.
You do not need to go far to find a startup that has received a very large investment, and as a result, it is mired in complacency, laziness and arrogance. Big investments are pleasant, you feel that you have achieved something, that you are successful, compared to other people. And, of course, this is not true. Getting investment is not a goal, it is an event that raises the stakes for all the hard work you need to do and build a business.
Some signs of cultural degradation.
Too much staff - slows down work and dulls reactions and changes. You are preparing the ground for future layoffs, even if the startup succeeds, because you most likely will not be able to distribute hired employees among those functions that will appear as the business grows.
Lazy management. It is easy for managers to descend to a state where their work will consist only in hiring, and all other aspects of management will suffer from this, which leads to disastrous consequences in terms of morality and efficiency.
Blowing up the engineering team is another side effect of over-active recruitment. And then the effect of the “ Mythical Person-Month ” begins, and everything slows down, the best people despair and leave, and you start having problems.
Insufficient concentration on the product and customers. It is very easy to lose passion for a product when you have a lot of money and nothing threatens you in the near future.
Too early activity of sellers who sell an unfinished product that has not reached a condition suitable for entering the market. This discourages first customers and makes it difficult to return to them when the product is finished.
Breaking deadlines. And where to rush, the money is there! A great opportunity for the emergence of a small, clumsy, but quick startup that will catch up with you and kick you on the bottom.
As my former boss Jim Barksdale said, the main thing is that the main thing remains the main thing. Do not lose concentration on the product and customers, act the same as if you had not received such large infusions. Easy to say, hard to do, but worth it.
Run as fast as you can, put the surplus in the bank and keep it for a rainy day or for a nuclear winter. Explain to everyone in the company until they become ill, and again explain that investment injections are not an achievement, you have not done anything except raising rates and raising tension.
Clearly demonstrate this with savings on material things - office, furniture, etc. What can you rely on, in my opinion - these are large monitors and ergonomic chairs. The rest should be from Ikea.
The easiest way to lose control over spending is to blow up the state. The second in terms of ease is big salaries. The first is worse, because a lot of people spend money faster than a few large salaries.
In general, behave as if you received much less money - say, act, and spend it that way. In particular, pay attention to deadlines. It is very easy after receiving the money to assume that all matters have become not very urgent. They are urgent. Competitors lurk behind every bush and tree, figuratively speaking. Keep moving at maximum speed if you want to survive.
Some startups received very large investments, squandered them like drunken sailors, and still achieved success. There is a chance that you will not succeed. Do not put at stake your company. Far more startups got paid, spent everything and went bankrupt. Remember startups like Geocast? General Magic? Microunity? HAL? Trilogy Systems? That's it.
Part 7
In this article I will answer the questions:
Too little investment - how much?
Too much investment - how much?
How to calculate the required amount and what can be done about it?
')
The first question is how much investment a startup needs . The answer must be sought in my theory of two life stages of a startup - before entering the market and after. Prior to launching, a startup needs to raise investments at least to enter the market. After the release, ideally you need so much investment so that you can use all the opportunities that have opened up, and then go to self-sufficiency, still using these opportunities.
Then I will show that “at a minimum” means such a quantity of money that exceeds what you plan to spend - so that you can cope with unpleasant surprises. In other words - insurance. This is especially true for start-ups that have not entered the market, because it is very difficult for them to figure out when this exit will happen. All this sounds obvious, but in my experience, surprisingly many startups are trying to attract investment, poorly representing the amount of money they need, and also what specific goals they will take.
What if you can't get so much money right away?
Obviously, many startups are finding out that they are not being given so much money - but you still need to have a good plan for spending money so that you can navigate the situation.
If you have not yet entered the market , and you are not able to raise investments for an exit, then you need to move as far as possible with the funds received, and in the next round of the search, show progress towards the market.
If you have already entered the market , and you are not able to find money for all the opportunities opened up before you - most likely in the development process you will see that it will be easier to find new investments than before.
What if you don't want to get a lot of money right away?
It can be said that if you receive money in smaller portions (before or after entering the market), then it will be easier for you to raise investments in the future, they will cost less and you will have to give a smaller percentage of the company. That is why some entrepreneurs decide not to chase after large investments. But I do not recommend this.
What could be the consequences of not getting enough money? You jeopardize the existence of the entire company.
1) You, most likely, do not foresee all obstacles for business. The product will not be released on time, there will be sudden quality problems, one of the main customers will go bankrupt, a new serious competitor will appear, you will be sued because of the use of proprietary technologies, you will lose a key engineer ...
2) Opportunities to receive funding in the future may not be. Sometimes investors are enthusiastic and finance new ventures, and sometimes not. When the window of opportunity closes, it is very difficult to convince them, especially in a volatile market situation. Those who start up in 2001-2003, understand perfectly what I am talking about.
3) Something completely unexpected and unpleasant can happen. Terrorism, diseases, war in the Middle East, North Korea launches a nuclear warhead rocket, giant meteorites ... Such incidents will not only close the window, they will keep it in such a state for a very long time.
Funny: a lot of business models from the Internet of the 90s, which at that time looked silly, work fine. And now there are a decent number of startups hailing from the late 90s, still working. OpenTable (planning to go public), TellMe (Microsoft sold for $ 800 million), Opsware (my company) - would go bankrupt if we had not forged money while it was hot; and received $ 100 million in profit for the year, and its current market value is about a billion. So the difference between start-ups from the 90s who have survived until today and those who did not live is that the first ones raised tons of money while they could do it.
So how much money do you need?
In general, the more the better. Only without the transfer of control over the company and without madness. Too aggressive entrepreneurs who try not to get too much investment in the hope of easily getting it in the future put the whole company on top, in addition to all the usual risks of startups.
Suppose you raised a lot of money and go great. You will be satisfied, even if you do not earn as much money as you could if you played this "roulette". And imagine that you did not raise enough money and you backfired. You lose the company and very sad about it. Is it worth it?
There is one more problem when you get a big investment, but this problem is important for everyone in different ways. Debt repayment. If you want to buy your company, the more money you received from investors, the more expensive you have to sell the company so that the difference in prices is substantial. That is, too large investments may hinder the future sale of the company. If you are sure that you will be bought, while not for a very large amount, then you should not get too large investments, simply in the financial sense. But this strategy has many other risks.
Taking all this into account, in normal situations, making large investments makes more sense, because then you are safe from surprises — and this is more important than worrying about blurring control or debt payments.
Is there too much money?
There are drawbacks to investing too much. I already mentioned two - blur control and too high a price for a potential sale. But a very big minus in big money is cultural decay.
You do not need to go far to find a startup that has received a very large investment, and as a result, it is mired in complacency, laziness and arrogance. Big investments are pleasant, you feel that you have achieved something, that you are successful, compared to other people. And, of course, this is not true. Getting investment is not a goal, it is an event that raises the stakes for all the hard work you need to do and build a business.
Some signs of cultural degradation.
Too much staff - slows down work and dulls reactions and changes. You are preparing the ground for future layoffs, even if the startup succeeds, because you most likely will not be able to distribute hired employees among those functions that will appear as the business grows.
Lazy management. It is easy for managers to descend to a state where their work will consist only in hiring, and all other aspects of management will suffer from this, which leads to disastrous consequences in terms of morality and efficiency.
Blowing up the engineering team is another side effect of over-active recruitment. And then the effect of the “ Mythical Person-Month ” begins, and everything slows down, the best people despair and leave, and you start having problems.
Insufficient concentration on the product and customers. It is very easy to lose passion for a product when you have a lot of money and nothing threatens you in the near future.
Too early activity of sellers who sell an unfinished product that has not reached a condition suitable for entering the market. This discourages first customers and makes it difficult to return to them when the product is finished.
Breaking deadlines. And where to rush, the money is there! A great opportunity for the emergence of a small, clumsy, but quick startup that will catch up with you and kick you on the bottom.
What if you got a very big investment?
As my former boss Jim Barksdale said, the main thing is that the main thing remains the main thing. Do not lose concentration on the product and customers, act the same as if you had not received such large infusions. Easy to say, hard to do, but worth it.
Run as fast as you can, put the surplus in the bank and keep it for a rainy day or for a nuclear winter. Explain to everyone in the company until they become ill, and again explain that investment injections are not an achievement, you have not done anything except raising rates and raising tension.
Clearly demonstrate this with savings on material things - office, furniture, etc. What can you rely on, in my opinion - these are large monitors and ergonomic chairs. The rest should be from Ikea.
The easiest way to lose control over spending is to blow up the state. The second in terms of ease is big salaries. The first is worse, because a lot of people spend money faster than a few large salaries.
In general, behave as if you received much less money - say, act, and spend it that way. In particular, pay attention to deadlines. It is very easy after receiving the money to assume that all matters have become not very urgent. They are urgent. Competitors lurk behind every bush and tree, figuratively speaking. Keep moving at maximum speed if you want to survive.
Some startups received very large investments, squandered them like drunken sailors, and still achieved success. There is a chance that you will not succeed. Do not put at stake your company. Far more startups got paid, spent everything and went bankrupt. Remember startups like Geocast? General Magic? Microunity? HAL? Trilogy Systems? That's it.
Part 7
Source: https://habr.com/ru/post/238169/
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