This is How Startups “Level Up” After Raising Money

Posted on Apr 10, 2014 | 0 comments


This is How Startups “Level Up” After Raising Money

One of the interesting things about being a VC is that you often see companies in transition. If you’re an early investor like I am that often means writing the first $2-3 million check into a business that previously had either survived on fumes or on a $500,000 angel round.

I also see companies as they move from having taken $1-5 million from me to their next round where they raise $8-15 million from Series B investors and sometimes I lead at this round (we’re stage agnostic but 80% of our deals are seed & A).

Moving from a company that had less resources (and presumably by the time they’re raising depleted resources) to a company with newfound resources can be telling.

I have seen many companies raise their first $3 million and still act like a company that has no resources at all. And while this might sound to the inexperienced person like a sensible idea – it is not. In a VC business when you raise additional capital you need to “level up” and act the round you are.

Of course I’m not preaching crazy, irrational spend or having Kid Rock at your next company party. But you do need to find a way to do activities that are more scalable. The founders are (or should be) the most valuable resources in the company and scaling implies that you bring in others to help accomplish tasks that allow the founders to get more leverage.

In some cases this is about getting routine tasks off of the founders plates. It’s why I wrote this post that the controversial first hire after an A round out to be an office manager / assistant / HR person who handles everything from stocking supplies to booking travel to scheduling group meetings. All of those things that you do yourself as a badge of honor in the early days are simply not your best use of time.

I’d say 20% of startups I see level-up early after their A round. What they do with the money is add more engineers and maybe hiring a marketing person. These are important leveling-up activities but the CEO is often still up at 10pm fucking around with QuickBooks entries.

Another obvious hire is thus a financial controller or finance director – preferably somebody with business planning experiences and not just an accountant. This allows a CEO to create a spreadsheet of expected activities over the next year but not spend the additional 8 hours perfecting and adjusting it. CEO’s need leverage.

When you hire somebody really strong in this function you can also give her the task of creating your board presentations. The average CEO spends 8-12 hours (sometimes more) preparing for board meetings. What if that time could go into thinking through the companies most important strategic issues, talking early with investors about their views and adjusting the strategic discussion slides rather than the update deck?

Level up. Act your stage.

I see the same thing happen at the transition from A round to B round. You’ve now raised your $10 million and you’re doing $1-5 million run rate revenues so you actually have income. But you’re still in shitty offices that makes it hard to hire talented new employees who are looking to join a company “going somewhere” not a company full of scrappers.

B round companies need to also look for scaling opportunities. The best ones bring in more executive leadership so you can appropriate allocate resources across sales, marketing, product, engineering and support. The best ones by now have an amazing finance leader who often doubles as head of internal operations. This finance director now deals with finding office space, managing legal issues, implementing HR policies as well as doing accounting and planning board meetings.

Other B-round scaling issues? Often it is a good idea to have a junior PR person in your company to interface with whatever PR firms you work with. Often the seat-of-the-pants decision making has to evolve into company processes so groups can make good decisions. You finally need to start planning your product roadmap a bit further than your 2-week sprints so that the rest of the organization has a chance to preplan for new features.

At the B-round great teams often hire their first business development person. While the CEO is still probably leading the charge on all biz dev deals of importance, there are the 5 sub meetings between open and close of a deal that require time and attention. You can do them all yourself, of course. But at what cost? Which other activities will get less attention than your negotiation over how the year-3 exit clause on your biz dev relationship will work?

If it’s an enterprise software company you can no longer rely on tacit knowledge to win sales campaigns. I’ve written before about the infrastructure you need to provide:

And then there is the C round. The company raises $15-25 million or more.

The first thing I often do at this stage is counsel the CEO that it’s time to be exactly that. The CEO of a seed-round company is still the doer of all tasks. Chief janitor if you will. Flipper of burgers. The CEO of an A or B round company still has her handles on the wheel doing all of the driving and often doing tasks herself.

At the C round she needs to level up.

By now the CEO either has super competent people running the functional parts of her business or she needs to bring in more heavyweight professionals to do so. The C-round CEO has to be more leader, less doer. The C-round CEO still gets her hand dirty but shouldn’t be a control freak or become a bottleneck in the organization.

You hired a head of product for a reason. You paid him the big bucks because he wasn’t the kind of person ready to take a risk with no pay when you started. But you have him now. Let him do his fucking job.

Your job is to sit down with him and plan out a strategic roadmap. Your job is to challenge his thinking because you’ve been spending the last few years in front of customers, competitors, partners and investors and you should have a more intuitive sense of the future. But your job isn’t to make every decision for him. You’re the coach, mentor, cheerleader.

As a leader it IS ok to overrule your head of product or other functions. After all, building organizations is about making difficult decisions across all functions and by definition this means overruling individual silos at times. But you can’t exercise this prerogative often and keep talented people on your team.

If you intervening too much it’s either because that functional leader isn’t strong enough and it’s time for an upgrade or it means that you’re overbearing and it’s likely that your most talented people will seek greener pastures.

As a VC I look for the signs of leaders who are likely to be these kinds of task masters because I don’t believe they are great team builders. This behavior very often comes out in meetings and presentations as the leader talks over his staff, tops & tails everything his team says or is downright condescending or rude. I have written about this before.

And while many leaders are like this and have pulled it off successfully – it takes an extraordinary leader to be able to be an asshole and still attract and retain talented people and it’s often through sheer success of the company more than a desire for people to work with that leader.

So my counsel at this stage is often: build out your senior team, let them do their jobs, become a leader more than just a doer, allocate your time to the higher-level tasks like setting company goals, managing investors, talking to partners, managing the press, etc. And mostly your job anyways is to be chief psychologist to the uber-talented team you’ve built rather than being chief dictator.

One of the more important posts I wrote on this topic is that leaders should “dip, not skip” meaning it is ok to reach down into the organization to have one’s fingers on the pulse but change should be delivered through your direct reports not through you.

And as companies move beyond the C-round the CEOs often become “captains of industry” which requires one to also build a personal network of other captains which can have a profound effect on large business development deals, M&A activities, mega financings, etc. These things don’t happen by themselves.

They happen to those that level up.

****

If you’re interested in more HR startup posts I have a bunch if you click that link. Photo as always from 500px.