The Challenge after the Seed Round

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Mazel Tov! You set up a start-up, completed a successful initial round and entered the development phase. Now you have to face complex financial challenges that will require you to have ongoing budget control, professional conduct with investors and dealing with unforeseen challenges along the way.

Here are some of the key elements for you to focus on:

 

 

What can you expect the day after a successful Seed Round? As with many promising startups, you may soon discover that your cash burn rate is higher than planned.

Therefore, at this stage you must start and formulate the next round, while understanding that unlike the first round, which was based mainly on the conceptual potential of the company, the second round will be based on the actual activity of the company and proof of feasibility. This is the stage where you are required to stabilize, demonstrate financial control and move in the desired direction to achieve your goals.

 

 

Proper communication that generates trust from investors

The company's financing comes from investors, and those who put their money on the basis of trust in the founding team, in the product and its suitability for the market. Therefore, whether you are entrepreneurs, CEOs or senior decision makers in the company, above all know how to communicate correctly and wisely with investors on an ongoing level.

There is a great deal of weight to the relationship between the entrepreneur and the investor. It is important to reflect on an ongoing basis where the company stands in terms of product development, to connect investors to the company's life and of course to the entire financial element. It is your job as entrepreneurs to adjust the form of reporting and conduct according to their requirements. For example, if they want detailed reporting once a month, or brief and relevant reporting once a week. You need to get to the point where investors trust the company, and give it the autonomy to act and lead the product forward. Such conduct increases investors' confidence in entrepreneurs and opens the gate correctly for the second round.

After the first round, it is recommended to cultivate a long-term relationship with potential new investors, in order to get to know the company, the product and the entrepreneurs personally. When the company has reached maturity and fulfilled the technological needs and marketing aspect, it is time to knock on the doors of the different funds out there while the potential valuation increases by tens of percent.

 

 

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The budget must serve the ROADMAP and not vice versa

A company must know how to work with a monthly budget that serves the company's roadmap. If, for example, you raised $2 million and should use them to reach a working product and an initial clientele, it is important that you know how to plan the cash burn rate given that the company does not yet have revenue.

It is not uncommon to meet situations in which start-ups build an initial budget for the investment fund, and after this stage, do not proactively manage budget and runs out of cash way before planned and presented.

There is no doubt that this is a common problem that quickly leads to an accelerated cash burn. It is important for entrepreneurs to adopt professional tools that will enable them to make decisions in an informed manner. If it is to perform a monthly closure, know how to work against a budget, question themselves in operational and financial aspects and at any given moment compare the data to their financial situation. If they still burn cash but do not advance at a desired pace of development, they may be required to recruit additional manpower or alternatively stop hiring certain employees, all correlated to the financial situation and roadmap.

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Positive Contribution is the difference between profit and loss

CONTRIBUTION Is an operational financial indicator for checking the profitability of your product or service. It is known that at any point in time there is a certain cost in order to reach end users, especially marketing costs. These costs are compared against the LTV (LIFETIME VALUE) which means the money that would come in from the end user throughout his life. When the LTV is high than the cost of the customer acquisition (CAC) and the cost of goods, we get a positive Contribution.

 

What happens when Contribution is negative?

Many start-ups fall for the wrong analysis of Contribution. Companies tend to fall in love with their product, and sometimes forget to do this calculation in depth and focus mainly on reaching users as quickly as possible. This could be a dangerous situation. You must constantly use highly experienced financial knowledge to check abandonment rates, accurate campaigns, maintain a positive Contribution and anticipate and prevent points from becoming negative.

 

 

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Here's how to successfully get past the coming “PIVOT”

Another challenge that many start-ups have to deal with is a change of direction, called the PIVOT.

At the intersection where a decision is made, PIVOT must be determined to succeed on the one hand, and on the other hand flexible enough to get through what feels like a failure. Now you would need professional thinking and financial planning to answer a number of questions: what is the new technological solution that is going in its direction, what adaptation should be done in the product, whether it is necessary to increase or reduce the company's workforce, how to update the schedules, how to price and update budgets. Many times it is necessary to update the marketing plan, advertising, and the rate at which cash is burned according to the above changes.

It is now more important than ever to reflect the situation in a mature and responsible way to investors. Not only to list facts and failures, but to give investors the feeling that they are full partners in the process of change, and often use their experience to get through the PIVOT.

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The above article is based on an article originally posted at Calcalist: https://www.calcalist.co.il/article/ByD1qNWuO