Your Startup Just Raised Millions. Now What?

Here’s how early-, growth- and late-stage companies should spend that precious cash.

Written by Joe Procopio
Published on Apr. 19, 2023
Your Startup Just Raised Millions. Now What?
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I constantly preach to entrepreneurs that before they even begin the process of raising outside capital, every penny of that money should be earmarked to an item on a plan that will result in a sizable return on that spend. 

How To Spend Your Millions in Startup Funding

$1 million: Build a viable product, prove its viability with real, paying customers, and find product-market fit. 

$10 million: Scale the business, including finding repeatable, automatable ways to acquire new customers at an ever-decreasing cost.

$100 million: Cut costs and extend runway on the way to an exit or next-level pivot.

All that preaching raises a fair question, and one I get a lot: As an entrepreneur myself, what would I do with that funding? What would be in the plan that I put in front of potential investors to give me the best chance of actually getting that money and putting it to good use?

There are a million different answers to this question because every startup is different. I’m going to break the answer down into guidelines that might help anyone raising money at various points in their startup’s growth.

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Early Stage: Buying Customers and Revenue

If I’m just starting out and in the early stages of my startup, I’m never trying to raise a ton of money. So let’s make the number reasonable and start with $1 million. 

I know. I have trouble putting “reasonable” and “$1 million” into the same sentence too. 

That also ties into the top misconception entrepreneurs have before they embark on their first fundraise — that they’re raising money to spend on the business at their discretion. While those words are technically true, thinking that way usually either results in not raising any money or burning through it quickly. 

When you raise money, you’re essentially asking to borrow money to buy something more valuable. In the early stages of a startup, nothing is more valuable than customers. When you raise money during this stage, think of the money as a means to buy those customers.

Investor money at the early stage is for acquiring paying customers. A lot of them. 

That segues into the second most popular misconception at this stage: buying customers is easy. Again, those words are technically true. If you spend more money than you should to acquire customers to whom you will give more than you should for a price less than they should pay, maybe even for free — that’s super easy. 

Investor money always makes that strategy seem like a viable option. The funny thing is, that’s true, too. But that’s when buying revenue becomes a must. Acquiring low-value customers is something I can do tomorrow, without investor money. Investor money at the early stage is for acquiring paying customers. A lot of them. 

The third most popular misconception in the early stage is the polar opposite of the first two, but just as dangerous. A lot of entrepreneurs look to raise money to build a finished product that will succeed in their target market. This is not only technically not true, it’s not even possible to define that product or that market in the early stage. 

So here’s where I’m spending my first $1 million. First I need to build a viable product and prove its viability with real, paying customers. Then I need to find product market fit, or, in other words, simultaneously refine my product to fit what I’ve defined as the market with the highest total addressable market (TAM) value for the lowest customer acquisition cost (CAC). Ideally, I also want to prove traction in that market.

 

Growth Stage: Buying Scale

Traction is the first step to scale. You can get traction in the early stages with some hard work and a lot of luck. But the higher the potential reward, the more elevated the risk. Billion-dollar valuations are built on high risk, which means more money, which means borrowing more and promising more in return. Let’s call it $10 million at the growth stage.

To fulfill the promise of return on that investment, a startup needs to turn traction into scale. But what is scale? 

Let’s go back to the early stages to figure that out, when we’re spending too much to give the customer too much for a price that’s too low. Think of scaling the business as finding balance throughout that entire equation. We want to spend just enough to give the customer just enough product value at a price that’s just enough. 

I’d use that $10 million to find each version of “just enough.”

For spending, it’s finding repeatable and even automatable ways of acquiring enough new customers at an ever-decreasing cost. 

For the product, it’s providing enough benefit to attract and keep those customers. 

For the price, it’s high enough to outweigh all the cost to build, sell, deliver and maintain that product, but low enough to enter more markets and acquire more customers.

You can see where balancing can get complex. If you spend too little to acquire customers, your product cost per customer forces you to price your product too high to attract more customers. That circular logic destroys a lot of startups, especially those who aren’t innovating and automating once they find tactics that work.

The investor money should be used to find and exploit tactics that work.   

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Late Stage: Buying EBITDA

Wait. Spend money to save money? This is exactly what you’re doing. A lot of the belt-tightening and layoffs we’re seeing right now at those high-raise, high-valuation private and public companies has to do with delaying that shift from buying customers and scale to buying margin and profitability.

At the late stage, we’ll bump up the raise to $100 million. But that kind of money isn’t about simply cutting costs and extending runway. Again, that’s something I can do any time, without investor funding. That kind of money should be spent to cut costs and extend runway on the way to exit, or in some cases, a next-level pivot. 

The former is about increasing the attractiveness of the company by maintaining as much of the explosive growth as possible, the reward, while reducing the costs to run the business, the risk. By nature, investors are far more comfortable investing small amounts in high-risk ventures. When they look to write large checks, they don’t want a lot of risk. This is true of venture capitalists, private equity firms, and even the public markets. 

It all goes back to raising the right money for the right reasons. Once you map that out, you increase your chances of actually getting that money and fulfilling the promise of the return on the investment. 

The latter is about taking on an entirely new business model or addressing an entirely new market. Simple examples might be Amazon getting into cloud computing or Apple getting into entertainment. When a company doesn’t have Amazon-level or Apple-level cash reserves, that money comes from investors.

So if I were to raise that kind of money, it would only be to do one or the other. To get there, I’d need to reduce risk at every point in the business. 

You know all those company failures, lots in the Web3 and DeFi space,  you read about? If you dig a little, you’ll usually find that those companies were able to raise outsized sums of money at the wrong stage and probably for the wrong reasons. 

It all goes back to raising the right money for the right reasons. Once you map that out, you increase your chances of actually getting that money, and more importantly, fulfilling the promise of the return on the investment. 

This content is for informational and educational purposes only. Built In strives to maintain accuracy in all its editorial coverage, but it is not intended to be a substitute for financial or legal advice.

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