This post is the second of three where Movac Fund 4 Operating Partner, Ed Robinson, discusses how VC works, what should you spend VC money on, and if, and how, you should, and can, move your company to the Valley. If there are topics you’d be interesting in hearing more about, let us know in the comments and we’ll see what we can do. Remember your can also find us on Twitter (@movac_vc)!
Spending your VC money – an Operating Partner’s perspective
Congratulations! Raising Raising Series-A investment from a VC firm is a massive vote of confidence in your company, your founding team and your vision. It means more than just capital. You can hire the people you need. You can buy the equipment you need. You can even make it rain. Most VC firms are “smart money”. Resources include venture partners with industry expertise, governance and connections. It is common to add one or new company directors from your investors. Along with resources and connections, these directors have their own set of expectations for how to use your new funding. Most companies raise 18-24 months runway, and this time goes by quickly, so let’s talk about investor expectations, what you’ll need to achieve, and how best to spend the money you just raised.
Understanding the start-up journey
In a previous post How VC Works, we looked at how investors seek a return on investment. On average this comes 3-8 years after Series-A, so chances are you’ll be raising again in 18 months. What you do in these 18 months is important. Investors want to see growth. Growth is more important than getting to break-even, because growth is the best indicator your company is a winner, and will return 10x or more on investment. Break-even companies generally don’t give 10x returns; high growth companies can. So in these 18 months, you’re either investing in growth or preparing your company for growth. Think about what your next pitch deck needs to look like and what goals you’ll need to have achieved to raise your next investment round. These form your guidelines.
A big challenge for every start-up is meeting your investors’ expectations. Investors want growth but in order to achieve growth, first you need to find product/market fit. This can take 6 months. It may take 2 years. But finding product/market fit is a critical step that can’t be skipped. There are plenty of reports that say the #1 cause of startup failure is scaling up for growth too early. This is tough. Investors and entrepreneurs are optimists, you sell to a few customers early on, and it is easy to believe you’ve “cracked the code”, when in reality spending your precious Series A money to scale sales and marketing too early will just reduce your runway and dampen confidence.
Every successful technology company follows three steps in its journey:
- Create an initial version of the technology and prove its usefulness for a few customers
- Prepare for growth by finding product/market fit
- Scale out sales + achieve rapid growth
If you’ve raised Series A, you’re probably in step 2: finding product/market fit. You should set expectations with your investors that the most important thing is to complete this step in the next 18 months before scaling up sales. I’ll cover how to find product/market fit in a future blog post.
Spending your Series-A money
Here are a couple of interesting statistics:
- For most technology start-ups, people costs (salaries and benefits) represent about 70% of expenditure.
- For a Series A technology company, at least half the staff should be research & development.
These are guidelines. Your mileage will vary. But the general principles are sound: hiring good staff will make-the-boat-go-faster, and focussing on research & development early on will mature your product faster, so growing your team in these areas is a good idea.
Unless you’re building a local service business, you need to consider your international strategy, and how to sell into export markets. Although it is tempting to hire a “VP Sales North America” early on, the simplest and most cost-effective approach is to hire your team in New Zealand. Think about delaying opening a USA, UK, or Australia office until you’ve found product/market fit and have enough capital and attention to do it properly:
- Opening and maintaining a USA or UK office is super expensive. You have legal costs, foreign compliance obligations, and market salaries are 1.5x to 2.0x the equivalent salary in New Zealand.
- Hiring a remote team requires a lot of attention. It is easy for them to get isolated and lose their connection to the core New Zealand team, especially when they’re working in a different timezone.
- Finding top talent in major markets like London or the Bay Area is incredibly competitive. You’re fighting for talent against the biggest names in the industry, offering benefits like sure-fire-stock-options, high salaries, catered meals, unlimited vacation and fully-funded-pet-insurance.
If you can’t delay, think carefully about whether and how your new connections can help. Firms like Movac have Operating Partners for this very reason. They have the skills and local expertise to make the transition easier.
That said, the main challenge for basing your team in New Zealand is figuring out how to do international sales and business development without a regional office. In reality this is simple. At Aptimize we did almost all our international sales over the phone from Wellington, and by flying to the USA and UK every six weeks to meet people. US companies are used to doing business via email and over the phone – if you hired a VP Sales North America, they’d probably be working their accounts remotely anyway. Doing international sales from New Zealand just means working odd hours, regular international travel, and investing in a decent conference call service. Interestingly, many US corporations still pay by cheque. Luckily most banks in New Zealand will let you deposit foreign currency cheques directly into your account (they just take a little longer to clear).
These, in my opinion, are the key things for spending your VC money. Invest in your team, grow the team locally for as long as possible, and spend every dollar as if it were coming out of your wallet. Leave the catered meals and fully-funded-pet-insurance until you’ve raised your Series-B!
In the next post we’ll look at the three things almost every New Zealand company gets wrong.
Ed Robinson was the co-founder and CEO of Aptimize, a Wellington based company acquired after two years by Riverbed Technology. Now based in San Francisco, Ed consults in product and market strategy, and is an Operating Partner in Movac Fund 4.