Raising massive rounds these days is so commonplace that most of us tune out fundraising news altogether. The fundraising environment has changed so dramatically over the past four years, it’s almost incomprehensible to those of us who lived through it.
A lot has been made of how ridiculous late-stage rounds have gotten, as well. Bill Gurley penned one of the best pieces I’ve read on the subject recently; to raise late-stage rounds, startups go through far less diligence and scrutiny than they would if they decide to go public. As a result, a lot of late-stage startups lack the operational discipline necessary to go public. I would argue that trend trickles down all the way to the earliest stages of venture-backed companies and really starts there.
Early-stage CEOs are practically taught to not even put a financial model in any of their fundraising decks until they get to their Series B. It’s all about building product in the early stages right? You don’t need to worry about figuring out a business since it’s all about growth in the early stages, right? Wrong.
Every CEO needs to fully understand the cost of doing business before deciding to raise any outside capital. You don’t want your burn rate to get ridiculous in the early days, so force yourself to put something basic together, even if it’s out of your comfort zone.
For those of you short on time, I decided to put something together very basic for you, which will at least give you a start in understanding how much you need to raise to get to your next milestone. I used Gumroad to share the link – you don’t need to pay anything to download the model – just donate “$0.” A few notes about my template are below.
This is not a one-size-fits-all solution. Think about customizing this in the context of your business. As an example, some companies may want to get a lot more granular about sales expenses to see if it makes sense to build an enterprise sales team. In order to analyze those costs, you will need to, as an addendum to this, add a lot of details on the quotas of individual salespeople, seasonality, ramp time, and numerous other factors. My model, simplistically looks at the fully loaded cost of salespeople if they hit their quota.
Include all of your recurring expenses, however small. The little things add up and you will discover that you are spending way more than you should on services you don’t use. Once you write down all of the little expenses, you’ll realize you’re burning a big hole in your wallet.
Write down everything as small as a domain that you bought from GoDaddy for a $19.95/year; you need to be frugal in the early days in order to be disciplined. Unanticipated, or unaccounted-for expenses will kill your startup faster than a bullet.
You should eventually take the time to build a marketing funnel. As you mature as a company, the marketing tab should be more granular and based on a real-life cost per acquisition number. For example, if you know that it costs you $200 to acquire a customer, and you know what your conversion rate by channel is (Facebook, Google, email, etc.), you should build an addendum to this that gets granular about which channels you intend to spend on.
Really sophisticated companies (generally at the growth stages) can get fancy with this and know exactly how many leads they are going to “buy” with their new funding, how many will convert to sales-qualified leads, and how many will eventually turn into paying customers (and know the LTV). This helps companies understand how quickly they can grow in the context of their funding.
You will spend more on vendors than you think, so cushion that substantially. The one that always gets people is “recruiting expenses.” The market is hyper-competitive right now for talent, and you may think for a while that you can do it yourself. The reality is, you will hire a contingency recruiter at some point in your company’s life cycle, and when you do, you will get a $25,000 surprise bill. I recommend third-party services to hire engineers; it takes the risk out of this type of expense because you only pay if the employee works out for a prolonged period of time.
“Fringe” is much higher than you think. The cost of hiring a salaried, full-time employee in the San Francisco Bay Area is expensive. It’s not limited to salary itself – you have to burden the employee’s cost to account for things like healthcare, 401k (if you’re going to have one), payroll tax and so on. To hire a $100k full-time employee in San Francisco in reality costs substantially more than $100k.
Office space prices are getting ridiculous. I often joke with my other founder friends that the reason companies have to raise so much is to pay their leases. Depending on the neighborhood, you will spend up to $97 per square foot in San Francisco. Not only that, but it’s rare to find a property management company that will take you in these days for lease terms less than three years. Kiss a few hundred k of your new shiny money behind to office space.
The bottom line is the money goes extremely fast depending on where you’re based. Bay Area salaries and office space are out of control (but the talent pool and access to capital are amazing), and if you are building a company here you will need more capital. With that being said, do not raise a dollar more than you need to – otherwise you may end up like Javeed from “Silicon Valley.”
I encourage every early-stage entrepreneur to use this, or something like this when considering how much to raise.
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