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The top 4 mistakes companies make when taking VC funding

Last updated: 06-04-2019

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The top 4 mistakes companies make when taking VC funding

Startup funding has reached record levels. In 2019 so far, there have been 34 new unicorns amassing over $8.3 billion in new money. This onslaught of capital adds to the pressure startup founders already face, making it easy to get caught up in the rush and make major mistakes that will affect a company’s future.

I have so far taken the alternate route and bootstrapped all four of my companies, growing them organically. This has allowed me to avoid some common pitfalls that can come when you take on outside funding. Of course, this isn’t always a feasible path for everyone. I’m not against funding and do think there are many business models that benefit from it. But company leaders must be vigilant to avoid the following mistakes.

Adversity forces creativity. Even though I know taking the stairs is better for me in the long run, I’ll always take an elevator if I have the option because it’s human nature to take shortcuts. The same thing happens in organizations. With limited capital, entrepreneurs are forced to be creative and come up with new tactics to grow the company. Hiring a bunch of people and throwing money at a problem is not an option, so the focus must be on creative problem-solving.

This is especially true when it comes to marketing and promoting the company. Without millions of dollars to put towards a major advertising campaign, companies must come up with guerrilla marketing strategies to make a splash on a tight budget. This means focusing on tactics that result in maximum impact for a low cost rather than buying eyeballs.

Cash can be a good substitute for creativity, but it’s a short-term one. It leads to rewarding the wrong spends – ones that deliver immediate results rather than increase company value – because company leaders are worried about metrics that don’t lead to any real value.

When there are millions in the bank and a race to raise the company valuation ahead of the next round, it’s easy for a business to lose its identity and diversify too quickly, diluting the value of the core product. Instead of investing in new lines of business, entrepreneurs should focus on making their main offering profitable first. Adding new services and businesses isn’t a fix if the original business isn’t making money – it just adds new potentially unprofitable businesses to the company.

A major point that all successful companies have in common is a clear sense of identity. When you think of a brand like Starbucks, you know exactly what you’re going to get and could describe the feeling the brand elicits. If Starbucks suddenly offered a ride-hail service or opened steakhouses, it would not only confuse customers but also do nothing to bolster the original café business.

When startups are overfunded, they often postpone monetization. This misses the point entirely, however, as monetization is less about making money to sustain the business and more about figuring out if customers derive enough value from the product to be willing to pay for it. All businesses must eventually monetize to move past the funding stage, so the sooner they can determine the value of their products and learn the lessons of monetization, the better.

Waiting to monetize also affects customers’ perception of value. If they got something for free, what would entice them to suddenly start paying for it? This adds challenges when a company finally needs to monetize and could be avoided if it’s prioritized from the outset. And this isn’t just an issue for companies offering free products. It also affects those offering their services for below their market value because it leads to lower profitability and makes customers perceive the product to be less valuable than it might be for the company to provide – look at MoviePass’ surge and subsequent downfall for a great example. Subsidizing a product or service with funding rather than revenue is not an effective long-term strategy.

The largest expenditure for most companies is people – making it easy to use an influx of new capital to quickly expand the size of the workforce and lose track of the quality. Overfunding tempts a rushed expansion, which risks a company hiring quantity instead of quality. It doesn’t matter how many employees a company hires; without the right talent it won’t reach its goals or build the founder’s vision.

Rather than looking at employees as a means to an end, entrepreneurs must view new hires as an integral part of the company’s growth and carefully select employees based on the potential value they will create.

There are many business models that rely on funding and find very high levels of success. But the entrepreneurs in charge of these companies know that no amount of money is a substitute for good ideas and management. No matter how much money a company has in the bank, it will be difficult to find success if they lose focus and forget to think about the value every decision will create. For this reason, we need to stop romanticizing high-valuation companies if they’re not focused on value creation.

Bhavin Turakhia is a serial entrepreneur who has built four companies and one non-profit, CodeChef, in the last 22 years. He co-founded Directi, which included the brands Reseller Club, Logicboxes, and BigRock, and exited in a $160 million transaction in 2014. He is presently head of Radix, a registry for top-level extensions, Flock, a suite of productivity apps, and Zeta, a digital payments platform. He is driven by the belief that we all have a moral obligation to make an impact that is proportionate to our potential.  

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