Welcome to Money Matters, conversations about financial matters for startups with Roseann Heavey, a partner at Noone Casey.
You have got the funding money. How do you spend it or not spend it?
As part of the funding round, you will have analysed your costs and calculated projections for one to two years. You have to be very clear what you need the money for and how you intend to spend it. Your entire projections should be based on how the funding will be used and show that the company can survive for a period on this money. That is as valid for pre-sales as it is for post-sales. You will have to begin to manage the costs on a monthly basis. Your funder will want to know how you are spending it and what you are doing with it – how the product is developing, how the brand is growing, how the sales are increasing. It is vital to look at the burn rate at the end of each month and what is being achieved and whether goals are being met.
What costs are put in the projections?
Everything from direct costs for sales, to salaries, consultant costs, hardware and software equipment, expenses for finance, legal, advertising, rent and utility costs. As soon as these costs start coming, it’s important to compare them to the projection to see if they were accurate. You will have to make adjustments if needed where expectations change, due to environment change or change in product
Since these are projections for one to two years, should founders put in a percentage of inflation?
Certainly – utility costs go up; equipment breaks down; rent goes up with new hires; salaries increase to keep people motivated. You have to filter all that through. That’s why you are following each month vigilantly. If you do, you will know early enough that the funding, you hoped would get you through 12 months, will, or in fact, dwindle down at month nine. Most startups are quite good at managing their cash; they know how much they need to survive and get things off the ground. My concern is that sometimes they have to focus too much on monitoring their funding cash and not enough on starting to make actual sales.
How do you budget for the unforeseen, for life happens?
You cannot. You just have to be prepared to take the grunt. It’s where company culture is vital – are your people treated well and engaged enough so that if they have to wait a few months for their salaries or have to work extra to cover for someone or fix a problem, they will be around to do it. It certainly wouldn’t be a good thing to be on the breadline every month. I know that’s easier said than done, but if you had a little bit of a buffer in your figures, you would be able to deal with such issues better. It can be a little savings pot that you manage to work around, by, for example, not making yet another hire and holding out until some problematic issue is sorted.
Are there any costs that are not put in the projections?
All costs have to go into them, because it’s what businesses should follow all the time and the projections should allow for the unforeseen costs. They are the guide for the business from the very beginning and are vital to keeping the founders focused on the actual spending and determining when sales need to kick in. Every aspect of the business that affects sales and costs has to be included. Some things won’t be exactly accurate, but that’s where a buffer helps. If you can sufficiently show how you spent the first round of the funding and the results you achieved will ease the process of getting a second round.
Can you use the money differently from the projection? What if you figured half way you need more people than originally planned?
It is the capital of the company at the end of the day so, yes, you can adjust. But be careful to assess why you weren’t correct in your projections, what changed? Don’t do it on a whim. If you have a full explanation why you are doing it and know the benefits you will reap from it, it’s fine. You also may need to run this by the funders so be sure to be clear on what the expectations were.
How should founders determine whether to have a budget for rewarding staff – rewarding for performance or taking them out for dinner to improve the company culture?
They should look at their week or month, and scratch out the costs that are inevitable – the bills, the salaries, etc. If there is leftover after that, they certainly should consider investing part of it in the employees and the health of the company culture. Engaged employees are more likely to stick around when the going gets tough. You will have a lot of similar unplanned costs and knowing your budget will help you decide whether it is worthwhile who to reward and when to do this.
What happens if things are not playing out as planned in the projection?
You will need to revisit the business model and the strategy of the whole startup. Why is it that you haven’t reached the sales? When do you think you’ll reach them? Is it because you’re not a good salesperson or not managing the money well? How did the unexpected costs happen? You have to sit down and reflect on these questions. It’s important to do it with your board, don’t go at it alone. The board can give you advice or help you. Remember, though, it’s not all your fault. Not all founders can be the best sales person, tech person, finance person all at once, so it’s important to use your resources. The funder also agreed that the projections appeared reasonable. Talk to the legal advisors, accountants, and other financial experts you have already engaged with. They can look at your figures objectively and spot something you have missed because you are too vested in them. Building a company is overwhelmingly difficult so don’t be too proud to ask for help. Also, don’t assume more funding is the answer, forgetting there are other ways to generate cash such as sales or offer consultancy on your specialised areas.
Is there any way to avoid a situation where you don’t believe your funders are the right fit?
When you are fundraising, think carefully if the backer is the right one. Getting one correct backer, rather than many small ones, is a way to make such a scenario less messy. If they believe in you and your product, then that will go a long way.
Have you seen a temptation to not give much thought to projections and their accuracy?
There isn’t so much a temptation as there is the effect from talking to many different people to ask them for their opinion on the numbers. They all give different numbers, and founders can get confused. That’s where the financial advisor comes in and puts some sense check on these projections. There is also a temptation to be more optimistic; it’s almost a prerequisite for founders. That is fine, but remember that every sales figure will need to be justified, rather than coming from thin air. How many users, how many sales, what unit price, what sales pipeline? You will have to answer all that.
How do you determine whether you’re not doing as good as you could or the projections were just wrong?
Again, you’re not just on your own. You will have a board of directors who will help you make sense of that. People from different areas and different disciplines will keep the company grounded. They will also pitch in with their deep expertise. But on a broader level, you have to understand sales don’t always happen when you expect them to. But if you know that they will do so eventually, you have to be prepared to put in the work and cope with the uncertainty. Asking for written consents from people that they will buy the product once it’s ready helps with the certainty of a sale before it takes place.
How do you strike that balance that you’re cautious but not too careful spending your money?
It’s one of the traits of great founders – they just know when to take the risk, and when not to. Part of it is being realistic and honest with yourself. Don’t hire someone, if deep down you know a particular sale won’t come through for four months. There is a fine line between being not risky and over-careless. You’d find out straight away if you were totally way off on what you projected. With each unplanned cost, you will learn whether it was worthwhile or not, and with time, you’ll learn to trust yourself.