Congratulations! You’ve decided to take your brilliant idea and make a business of it. You’re already in the top one percentile of people, who actually act upon their ideas.
Your newly founded start-up will need funding to get started; you may have to pay some of your early team members a salary, you’ll need some working space, you may need design tools or some initial working capital if you’re developing and marketing a tangible product. You may be able to avoid some of these costs in the earlier days, but you'll need some funds as it’s unrealistic to think you can get by for very long without having to pay out-of-pocket for anything. Sure, you may have heard of someone who did just that but those examples are one-in-a-million; and, how did their business venture actually turn out? Don’t count on this no-money approach working out.
This initial start-up capital could come from the founders themselves. By getting started with no outside money you don’t have to worry about managing those investors, which can take up a lot of the CEO/Founder’s time. If you don’t have sufficient funds amongst the founders to get started, or to stay in business while you go through the start-up phase, then you’ll have no choice but to raise capital from outside investors.
Most successful start-ups raise seed money from angel investors, who could be arm-length individuals you meet along the way, or from friends and family. Once your products/solutions gain some traction then you can raise money from institutional investors such as super-angels, venture capitalists or family offices. This phase will help you transition from a start-up business to a business scaling up. Regardless of what stage you are at the moment you take a dime of funding from an outside investor, you take on several important obligations and you have now set some expectations for people outside your company.
Investors expect to receive regular updates on the progress of the business, including sharing what upcoming things the team is excited about and some sense of what things are keeping the team up at night (btw - if you are sleeping soundly every night, your plans are likely unexciting or insufficiently aggressive, ha!). They'll likely want some sense of how much traction the business is getting and which way that traction is trending. This can be in the form of product orders, sales revenue, daily active users (“DAUs”), monthly active users (“MAUs”), or the number of transactions occurring if you are a “marketplace” start-up.
Some of this information-sharing and the frequency of these updates may be a contractual obligation in your investment agreements (convertible notes, SAFEs, shareholder agreements, loan agreements). If there is no contractual obligation, you still have a moral and ethical obligation to keep those people who gave you money up-to-date on the business.
Even if you have nothing to share but bad news, or no news at all, sending out regular updates is still important. The worst thing you can do as founder/CEO is to go radio silent. Investors get nervous when this happens and start to assume the worst. At which point they will start calling, emailing and text you constantly until you respond. Which brings us to being responsive to investors.
Even with regular informative updates you will receive ad-hoc inquiries from your investors. Respond to these promptly. If you get a call, call back. Respond to every email and every text from an investor, and in your response offer to give them a call or meet them if they have more questions. These gestures and simple discipline of being responsive will get you a lot of respect, latitude and patience with your investors. And your reputation as a founder/CEO will solidify, even if the business is struggling or ultimately fails. This professionalism will serve you well throughout your career.
Investments are made with the expectations that they will deliver a return that is greater than the principal amount invested in your start-up. No shit Sherlock! I know, it’s an obvious statement but it still surprises me how often entrepreneurs and founders lose sight of this point.
Every spending decision by the founder/CEO has to be made through this lens: how that spending is going to help us achieve our business objectives, and how it’s ultimately going to generate sales of our products or help reduce our operating costs. Some spending will have a more direct correlation to these objectives than others, but this thinking has to prevail almost constantly. Investors are assessing and ultimately trusting you as a founder to think this way. As the business grows and enters scale-up phase a VP Finance or CFO may be brought in to help with this discipline as the business volume increases and operations get more complex.
If you’re starting up a business because it will be fun, you’ll learn some new skills and gain some new experiences along the way, that's great! But if that’s the sole reason you’re in it, don’t take money from outside. Don’t mislead outside investors; you started a business and are operating that business with outside money...to generate sales and make a profit. Yes, it is important for founders to create a safe, welcoming and fun culture...and the workplace and work schedule are an important part of that. People make the company...very true. However, every team member needs to always remember the primary objective of that business - generate sales and be profitable. Every business exists for this reason. Your investors gave you money for this reason.
Investors expect your business to grow in market share and in value, and for there to be a liquidity event of some kind (an IPO, an RTO or to be acquired) and that they make money on their investment.
Outside money is investing in a business idea, but ultimately it is investing in you and the founding team. They are trusting you. With that comes obligations and responsibilities.
Thank you for investing time in reading this post. Questions and comments are always welcome.
Shail Paliwal
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