One of the most common indicators for startup success is the amount of funding that they can secure/have secured.
We have taken this so much for granted that we may have lost sight of its implications. Yes, getting funded, either seed funding by angel investors or larger rounds by professional investors, is a really good indicator that they have won some trust over people. And this is good news.
The problem lies within the cause-effect relationship of this conclusion. It should be that you get good therefore you get funded, rather than you get funded therefore you try to find out how to be good.
Another common mistake is what startups do with the funds. The first reaction is to pay themselves (at least all the co-founders working full-time on the project). Yes, this is fair but the question is how much is the right amount (in relationship to the equity they hold in the company). The second reaction is to start hiring – whether that’s IT, marketing or business development help. And this is usually where startups make the bigger mistake.
First, hiring is hard – regardless of startups or large corporates. But it’s even more difficult for the early stage startups. With the limited initial funds these startups get, the margin of error is next to nothing. And we have not even talked about training, retaining, motivating this group of people, who are likely to be excited but less experienced.
So what should startups do then?
Instead of breaking the funds into payments (i.e. salary) for different channels, startups should develop a simple ‘critical path to success’ for the next X months (the exact period depends on the nature of the startups). Critical path to success is basically the minimum number of objectives/tasks that are needed in order for the startups to ‘survive’ the upcoming period.
So, for example, instead of thinking of hiring a ‘business development executive’, startups should think of how many contracts they need to secure, and more importantly, what are the absolute minimum amount of tasks they need to do in order to secure these contracts. Some of those tasks will inevitably be more ‘intangible’ and may require external and ad hoc support (e.g introduction of networks, strategic planning, management support, use of specialists). Some may be more labour intensive for this period, but probably not for the next (remember the focus should be this upcoming period only because things change all the time for startups). Therefore, the decision of hiring should be evaluated in light of whether the additional headcount is the most beneficial way of achieving thsese minimal set of tasks that are critical the success of the startups.
So when startups consider the next round of funding, perhaps they should first design this ‘critical path to success’ in order to get all the right and necessary help.
It is ofter more than money.