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Startup Next Steps After Raising First Million

Startups raise millions all the time now, but what should founders do after they do? Here are the 4 immediate steps every founder should take the day the check hits.

You just raised $10 million, and the series A just hit your bank account. What do you do from there? Founders sometimes do stupid things like run out and buy a dozen cars with it (come on, haven’t you heard of a lease?) or they’ll raise everyone’s salary to $200,000 a year no matter who it is and what they do for the team — those companies die. If you’ve raised a lot of money and you want to put it to good use, here is what you should do when you finally get funded:

  1. Get your head right.
  2. Make a plan.
  3. Focus on retention before growth.
  4. Prepare for the plan to go wrong.

In my experience, these are the things that come up every single time no matter how much you’ve raised.

Get your head right

You might have just raised your first $500,000 pre-seed round, a $2 million seed round or a $10 million series A. In each of these cases, the mindset is the same: how do you turn that money into a lot more money? Remember raising money is the starting gun. Don’t celebrate the raise. Celebrate when you finish a stage, when you’ve reached some sort of real milestone. Celebrate more customers or more revenue. Remember it’s not your money; it’s not your personal money. Remember those examples I mentioned earlier? Founders sometimes act as if the money is actually theirs, and then they can use it as they see fit. That’s not right.

A startup is a promise that you’ll be good stewards of it and put it into things that will generate more money. The CEO and management team actually has a fiduciary duty to further the interests of the company, so everything you do needs to be about that — don’t just buy cars when you can lease them.

Likewise, beware of giving raises to everyone immediately, especially when there’s not a good business case to do that. Every dollar counts. Your investors are actually investing in you, your team, your product and your mission. Every dollar you spend needs to have that investment mindset. For every dollar you spend, ask yourself, “Will it come back? How will it come back and when?” For instance, you might need to hire someone to do marketing for you. How long will they take to ramp up, and how will you measure whether or not they’re successful? If you hire someone good at marketing, they might increase your sales by 10% a month, and if that’s true, then that adds up to 3X over the course of a year. That is the kind of thing that pays back for sure.

And the opposite is also true. If you can spend an extra $200,000 a year on an office, you have to ask, “Can I get it back somehow? Will I be able to hire better engineers? Will I impress enterprise customers when they come visit us at our office, and will they convert at a higher rate? Can I take that and make a dollar amount to see if I can actually get that money back in some way?”

It’s not just money; it’s an investment and an investment needs to be paid back. These things require judgment and estimation, and it’s hard to do, but even the act of trying to justify each cost with a simple question —  how will I get paid back? — is an exercise that will make it much clearer to you what you should and should not spend money on. Every dollar counts.

Make a plan

The next thing we got to do is make a plan to get to the next stage. Picture this. You’re sitting at a gas station and you’re filling up on gas. Now it’s time to go.

As silly as it sounds, you do need to start planning how to get to the next gas station before you even leave this one. The same is true for your startup. You need to figure out how to get to that next round and work backwards from that. What does getting to the next gas station look like? How much growth is enough?

For most companies, that means focusing on revenue growth. Everyone knows you have to grow but how much? It turns out you have to grow really fast. You need to grow at least 3X per year — that’s about 10% per month. Neeraj Agrawal of Battery Ventures simplified the journey of SaaS companies down to this very simple formula:

First, you get to $1 million in net revenue and raise a series A. Then, you need:

  • 3X growth in Year 1
  • 3X growth in Year 2
  • 2X growth in Year 3
  • 2X growth in Year 4
  • 2X growth in Year 5

= $100M ARR AND AN IPO

That’s a win.

As you can see below, Battery actually derived this from the successful paths of SaaS companies like Marketo, NetSuite, Zendesk and Salesforce.

Even if you’re not a SaaS company, this is actually quite useful for you to know how you and your net revenue might track back to venture capital broadly. And notice I’m saying net revenue. What is the amount of money that your company can eat on? What can you use to pay salaries and offset expenses? That’s net revenue. This is different from GMV.

GMV is something that a lot of beginning founders get confused about. When we talk about revenue, we’re talking about net. If you’re lucky or good or both, you’re actually growing faster than 3X per year by the time you raise your Series A. Keep in mind that everyone throws around the word “growth,” but this is much easier said than done. It’s very hard to inflect up. The faster you’re growing at your series A, the more likely you are going to be successful and get all the way to the promised land.

Now that you know about growth, let’s talk about coming up with an operating plan, something that breaks down your revenue costs and bank account every month for the next 24 months. You can think of it as almost a to-do list that has financial information attached to it to make sure that you have the capital to get to your goal.

  1. First off, start by making a list of your costs. Who do you have to hire? What roles, how many people, and what do you think the average salary will be for those positions? Do you need a new office and when? You can’t hire them all at once. It’s just not realistic. You can pretty easily double a team from three to six people, but it’s really hard to go from 10 to 20 or 20 to 40 in a single year. Making a plan helps you think through all of these issues. As is true with everything, timing is key.
  2. After that, you have to think through your revenue streams. When will you make money and how? How many units will you sell and when? How do you know that can be right? Be careful. Here’s where a lot of people don’t do the thinking needed to build a real operating plan around revenue. Sometimes, they just take the revenue they have, drag it to the right and say, “We’re just going to grow 10% every single month.” That might be fine for a silly wild-ass guess, but as soon as you can, you’re going to want to figure out realistic numbers and the realistic amount of time and effort to model that. Instead of just saying 10% every single month, you have to think about your inputs that get you to your outputs. How many leads do you actually have to talk to every single month, and what’s your conversion rate? How much do those leads cost? If you can take the historical way you got customers, think about the variables that go in and then use that to model it out and link it back to cost, that is the best possible way to do an operating plan around revenue — that’s the gold standard.
  3. Now, the only other thing you have to keep in mind about operating plans is that you need to treat it as a living document that you try to manage too. It’s okay to get it wrong, but you should keep updating it month by month as things change so you can use it as a barometer of where you’re headed and if things are tracking. It lets you find issues before they pop up. If sales are picking up faster than you expect, the operating plan might help you realize that you need to hire more people in customer support sooner. Otherwise, your customers won’t stick around or have a good experience, and vice versa, if sales or marketing is not panning out, you might need to slow down hiring on that side to reduce your burn and give yourself more runway so that product and engineering can build a better product. Use this document with your executive team and your investors or your board if you have one. This will allow you to walk into that meeting with a clear picture of the business and how it’s going.

In particular, a good operating plan will give you a much better idea of whether your startup can get from the last gas station to the next one. It’s way better to see these issues months or years out when you can fix them, not when it’s too late.

Retention before growth

Of note, sometimes people spend a crazy amount of money on growth when they don’t have retention figured out. What’s retention? It’s how many of your customers stick around and how long. Retention’s inverse is churn. Churn is the percentage of people over a time period who left and didn’t ever come back. If you had 6% churn in a month, it means 94% of your users were retained. Here is an amazing resource from Lenny Rachitsky. It goes into what retention looks like for different types of businesses. Now let’s break down the two types of retention mentioned here.

First is user retention, which is sometimes called logo retention. This means if a customer signs up, how many of them are still using you six months later. So if you just launched and you only have one month of data, how do you figure out what your six month might be? Let’s say in month one that you kept 95% of your users, then you can do .956 , which equals 73% user retention at six months. By all accounts, at that point, you’d say, “Wow. I have something really special.” Across all the different types of businesses, this is amazing user retention.

You might ask, “Why are there different levels of retention for different types of businesses?” Well, it turns out consumer businesses are just very different than enterprise. The potential customer base for consumer is huge, possibly even the whole smartphone-owning populace. That means that you generally don’t have to spend as much money to acquire those users — think Facebook or Instagram. For enterprise companies, you need much higher retention because it usually costs so much more to get them in the first place. That’s why you need a sales team and a lot of marketing budget; couple that with the fact that there just aren’t as many people in businesses that might need that software. Well, that’s why retention needs to be higher — think Salesforce. Salesforce is a good example of an enterprise business where that’s true.

The other type of retention Lenny talks about is net revenue retention, which is measured over 12 months, and sometimes called net dollar retention. It’s less important for consumer businesses and a lot more important for enterprise. Again, those businesses might have an average revenue per customer of $100,000 or more, and the cost to get them is sometimes on the order of that much as well. That’s a lot of money to get one customer. In those cases, you want to be able to land a pilot and then expand as the product works, which is why the retention or the dollar amount needs to be much, much better. Snowflake is a good example of this, and you can see how the market values that type of net dollar retention.

Okay, now that we know what retention is, do you focus on growth or retention first? My recommendation is always to focus on retention. Retention is the single key thing to showing that a product or service actually works. Did you actually solve the problem? Did you actually make your user or customer happy? If so, they’re going to come back and keep using you. If you focus on growth first and your retention is less than good, you’ve got a leaky bucket. You can pour all the users you want in the top of the funnel, but if they just leave, there’s no way for you to actually make a working business doing what you’re doing. Focus on retention first.

When the plan goes wrong

So you’ve got a plan; you’ve got retention; and you’ve even nailed growth. If you can nail your growth and keep on the path of triple twice, double three times, you’ll be sailing to an IPO just fine.

Along the way, basically everyone gets punched in the face. What if growth stalls? What if something happens to you along the way to your destination? You might look down and find that you don’t have the runway to show the traction you need to raise the next round. What can you do?

First off, get default alive if you can. Default alive means make money and get to a point where you can survive without raising more money. That’s the number one advice we give though you’d be surprised how uncommon it is sometimes. Some VCs only care about growth and don’t want you to be walking dead; they’d rather you try to grow at any cost and die than to stick around. That’s not me. Personally, I think a good founder can always find a way to keep growing, and if you can get profitable, you can often start cash flowing and reinvesting in your own business without ever raising any more money.

Revisit: Sell? Die? No. Grow profitably. How Ooshma Garg and Gobble did it

If you can’t get default alive, you need to slow down to figure out a way to get there. This is painful, so get ready. It means a reduction in force and spend, layoffs. None of this is fun, but you have to do what you have to do to save your business; pretending the problem isn’t there won’t solve it. If you have to cut, do it once and do it as deeply and as humanly as you possibly can so that you can avoid doing it again. Figure out a plan that’s realistic and attainable to get you to the next station.

Sometimes people want to stomp on the accelerator, and the reality is I’ve never seen that work. If you’re in a car and you’re running out of gas, you don’t mash on the accelerator to try to run out of gas faster. You try to increase your efficiency by reducing your speed. You’d be surprised how often this can work, especially if you need just a little bit more time on product engineering to dial product-market fit or to pivot slightly to a different market. Of course, that leads to the pivot. If none of these other options really pencil and you can’t figure out how to do it with this idea or this market, you may well have to do a full pivot. A good example of this is how Instagram actually pivoted out of their previous idea. They were actually an HTML5 clone of Foursquare. It’s kind of crazy to think that that’s how Instagram actually started, especially now knowing what Instagram is for society today. It was an amazing decision.

Finally, one more thing you can do and what you should do is actually talk to your investors about a round extension to the last round. If you’ve executed well but hit some headwinds, you may well find this is a path you can explore: have a frank discussion; talk to investors one-on-one; and just see where it goes. One thing to really keep in mind if you’re asking for more money from existing investors though is that you need to combine this ask with some form of the other things we talked about. Can you be default alive or can you find a pivot that can show product-market fit? Nobody will bridge you to nowhere.

Recap

Let’s recap what you need to know now that you’ve got the money to build your dreams.

  1. Get your head right. Every dollar has to pay back.
  2. Make an operating plan and manage to it.
  3. Focus on retention before growth; otherwise, you’ve got a leaky bucket.
  4. Know you have to think through your options even if things don’t go to plan. So often they don’t. You’ve got this. There’s a way forward.

Thanks for reading! To watch my full episodes that go into detail about these ideas — and more — head over to my YouTube channel and follow me on Twitter (@garrytan) for real-time updates.