5 Words of Wisdom For VC Startup Scaling

And rest assured—VC startup investors are out there, with checkbooks ready.  From 2017 to 2018, the size of VC seed-stage investments swelled from 1.6 million to 2.1 million (with industry trade groups calling it “awash” with money).  The PwC/CB Insights MoneyTree Report showed a similar ratio of growth, although the figures differ.  The median size of seed-round deals in that study rose from $1.3 million to $1.7 million between Q1 of 2017 and Q3 of 2018:

(Source: PwC / CB Insights)

With so many chips in the pot these days, investors need to know how their money will produce results.  Will you hire a blue-chip executive?  Bring on more sales team talent? Acquire a small company with something you need?

5 Words of Wisdom For VC Startup Scaling

Here are five words of wisdom to anchor you as you navigate the complex and challenging process of VC startup scaling:

1) “MODERATION” — Raise Only What You Need

Know how much capital you’ll need to hit your next stage, and raise only that much.  Too much money in the war chest can push you towards decisions your company is not yet ready to make or set the bar too high for your exit.

There’s no index where you can look up how much money you’ll need to raise.  It depends on your growth stage, market, product, team makeup, and any number of other relative factors.  If you know other entrepreneurs in the same category, you could ask them for advice. If not, a useful guideline is to take the amount of capital that will sustain your company for 18 months and add an extra 25-50% to it.  This should account for growth and any unanticipated costs until you reach your next stage.

Whatever range of financial targets your research turns up, the best course of action is to stick to the conservative end.  It’s tough to keep your books disciplined—like you did when funding was scarce—if there’s extra cash flow available. Excess capital may encourage a founder to dramatically increase burn rates or spread the company thin. Doing so would be a misstep, however, as it is often healthier to solidify your core business.

As a collateral benefit, the smaller the VC investment, the less control you’ll have to give up to your investor.  You can always assess whether you need to raise more capital when you hit your next stage.

2) “IMPROVEMENT” — Fund Real R&D

Few VCs are willing to hand over money to a company that doesn’t have a working product and proof of customers.  Ideation and the necessary research to reach a proof-of-concept or prototype aren’t typically the realm of VC.  

You’re raising money to support the growth of a product you’ve already developed.  One of the best ways to assure an investor of this is to put plenty of funding into real R&D that will refine your promising product into its optimal form. The technology or product improvements you pursue must be:

• Substantial
• Justifiable
• Targeted at realistic market gains

Ultimately, you’re looking for an investment to help you prep for an explosive growth stage. Show the VC how this research can help.  Intangible investments like R&D may feel indirect (compared to advertising or hiring sales personnel), but this is what greases the wheels.

Employees, ad campaigns, and an expanded supply chain are useful, but they aren’t ultimately what you’re selling.  Your foundation for sustainability is a quality product.

3) “GUIDANCE” — Bring on a Mentor

VC startup scaling takes hard work and strong leadership.  The prevailing wisdom among VC investors has always been that management is prime.  For some, that means the first move after investing will be to install a professional CEO to take over for the founder.  That’s rarely something entrepreneurs are interested in, but you may be able to circumvent it by taking on a qualified business mentor yourself.

As Wright Steenrod of Chrysalis Ventures colorfully puts it, “When someone gives you venture capital, it's like someone handing you a grenade with the pin pulled. If you know what to do with it, it can be very useful, if you don't know what to do with it, it can blow up in your face.”  This is what the VC wants to avoid. You can calm this concern by hiring or partnering with a top-notch executive that has the requisite experience to guide your entrepreneurial drive.

Dileep Rao, a venture capital financier and professor of high-performance entrepreneurship, is very supportive of this approach.  He relays that Michael Dell brought on a mentor to help him lead Dell.  Larry Page and Sergey Brin likewise recruited businessman Eric Schmidt to help them run Google.

If you hire the expert yourself, you’ll retain more control over your VC startup in the scaling process.

4) “REFLECTION” — Hindsight is 20/20

Startup scaling is about company growth, for sure.  But it’s also about scaling profits. As you look for the most profitable ways to allocate VC startup funding, it’s wise to ask yourself, “What decisions produced the most profits in the past?”  These might include:

• Your best marketing campaigns
• Top clients you signed
• Sales strategies that improved close rates
• Highest-rated product improvements

Analytics and anecdotes from your historical performance can give you insights into what’s likely to create profits in the future as well.  If it worked well before, you could probably do it again—at scale—by expanding the highest impact efforts or launching similar initiatives.

Data also reveals the inefficiencies you can eliminate to increase your profit ratio.  Take a look at your backlog of marketing data, financial statements, and KPI reports. There are bound to be clues about ways you could boost cash flow, reduce overhead, or increase margins.  Sometimes looking backward helps you look forward.

5) “PATIENCE” — Recycle Your Profits

VC investment can boost profits in short order, but don’t trust immediate returns to be self-sustaining.  You might feel pressure to spread fresh profits among investor dividends or to start paying down the company’s long-term debts.  Doing so would take money out of the company in its most critical growth phase. Instead, reinvest profits back into the company.  Only through a maximum focus on self-improvement and growth can you give your VC startup its best shot at becoming a sustainable business.

VC investors aren’t looking for you to pay them back quickly so much as they are looking for you to pay them back handsomely.  It’s often a 10-year exit plan, and they want you to succeed long term.  At this point, you should be keeping the money internal to cover:

• Cash flow shortages
• Service delivery improvements
• Smart sales and marketing strategies
• Further expansions or developments of your product

These are the priorities that will snowball your momentum and produce higher profits in the long run.

With Great Power Comes Great Responsibility

A VC investment is exciting, but it’s still just the beginning.  Seed money is fuel for startup scaling—not a guarantee you’ll exit profitably.  The reality is you’re unlikely to get another investment if this round doesn’t go according to plan.  Even in the heart-pounding rush of scaling efforts, that capital must be spent wisely (and deliberately) to grow your company towards the exit.

Go into your investment prepared, armed with data, proper guidance, and clear goals. Do that, and your investment will be the rocket fuel that lifts your VC startup spaceship off the ground.