- So you just raised $10 million,
and the series A just hit your bank account.
What do you do from there?
Founders sometimes do stupid things
like run out and buy a dozen cars with it.
Come on, haven't you heard of a lease?
Or they'll raise everyone's salary to $200,000 a year,
no matter who it is, and what they do for the team.
Those companies die.
If you've raised a lot of money
and you want to put it to good use, stay tuned.
Today, we're going to talk about what founders should be doing
when they finally get the money they hope to get.
Let's get into it.
(upbeat music)
Here's what we're going to cover today.
First, get your head right, then make a plan.
Focus on retention before growth,
and finally, we'll talk about what happens
when something doesn't quite go to plan.
In my experience, these are the things
that come up every single time,
no matter how much you've raised.
You might have just raised
your first $500,000 pre-seed round,
you might've raised a $2 million seed round,
or even a $10 million series A.
In each of these cases, the mindset is the same.
How do you turn that money into a lot more money?
Remember, raising money is the starting gun.
Don't celebrate the raise,
celebrate when you finish a stage,
when you've reached some sort of real milestone.
Celebrate more customers or more revenue.
Remember, it's not your money,
it's not your personal money.
Remember those examples I mentioned earlier?
Founders sometimes act as if the money is actually theirs,
and then they can use it as they see fit.
That's not right.
A startup is a promise that you'll be good stewards of it
and put it into things that will generate more money.
The CEO and management team actually has a fiduciary duty
to further the interests of the company,
so everything you do needs to be about that.
Don't just buy cars when you can lease them.
Likewise, beware of giving raises to everyone immediately,
especially when there's not a good business case to do that.
Every dollar counts.
Your investors are actually investing
in you, your team, your product, and your mission,
so every dollar you spend needs to have
that investment mindset.
For every dollar you spend, will it come back?
How will it come back, and when?
For instance, you might need to hire someone
to do marketing for you.
How long will they take to ramp up,
and how will you measure whether or not they're successful?
If you hire someone good at marketing,
they might increase your sales by 10% a month,
and if that's true, then that adds up to 3X
over the course of a year.
That is the kind of thing that pays back for sure.
And the opposite is also true.
If you can spend an extra $200,000 a year on an office,
you have to ask, can I get it back somehow?
Will I be able to hire better engineers?
Will I impress enterprise customers
when they come and visit us at our office,
and will they convert at a higher rate?
Can I take that and make a dollar amount
to see if I can actually get that money back in some way?
It's not just money, it's an investment,
and an investment needs to be paid back.
These things require judgment and estimation,
and it's hard to do,
but even the act of trying to justify each cost
with a simple question, how will I get paid back?
is an exercise that will make it much clearer to you
what you should and should not spend money on.
Every dollar counts.
The next thing we got to do is make a plan
to get to the next stage.
Picture this, you're sitting at a gas station,
and you're filling up on gas.
Now it's time to go.
As silly as it sounds,
you do need to start planning
how to get to the next gas station
before you even leave this one.
The same is true for your startup.
You need to figure out how to get to that next round
and work backwards from that.
What does getting to the next gas station look like?
How much growth is enough?
For most companies, that means focusing on revenue growth.
Everyone knows you have to grow, but how much?
It turns out you have to grow really fast.
You need to grow at least 3X per year.
That's about 10% per month.
Neeraj Agrawal of Battery Ventures simplified the journey
of software as a service companies
down to this very simple formula.
First, you get to 1 million in net revenue
and raise a series A.
Then you need a triple, triple, double, double, double
in revenue over five years,
and you're at a $100 million annualized revenue.
You can IPO at that point. That's a win.
As you can see here, Battery actually derive this
from the successful paths of software as a service companies
like Marketo, NetSuite, Zendesk, and Salesforce.
Even if you're not a SaaS company,
this is actually quite useful for you
to know how you and your net revenue
might track back to venture capital broadly.
And notice, I'm saying net revenue.
What is the amount of money that your company can eat on?
What can you use to pay salaries and offset expenses?
That's net revenue.
This is different than GMV.
GMV is something that a lot of beginning founders
get confused about.
When we talk about revenue, we're talking about net.
If you're lucky, or good, or both,
you're actually growing faster than 3X per year
by the time you raise your series A.
Keep in mind, everyone throws around the word growth,
but this is much easier said than done.
It's very hard to inflect up,
and so the faster you're growing at your series A,
the more likely you are going to be successful
and get all the way to the promised land.
So now you know about growth,
let's talk about coming up with an operating plan,
something that breaks down
your revenue costs and bank account
every month for the next 24 months.
You can think of it as almost a to-do list
that has financial information attached to it
to make sure that you have the capital to get to your goal.
First off, start by making a list of your costs.
Who do you have to hire?
What roles, how many people,
and what do you think the average salary will be
for those positions?
Do you need a new office, and when?
You can't hire them all at once, it's just not realistic.
You can pretty easily double a team
from three to six people,
but it's really hard to go from 10 to 20, or 20 to 40,
in a single year.
Making a plan helps you think through all of these issues.
As is true with everything, timing is key.
After that, you've got to think through your revenue streams.
When will you make money, and how?
How many units will you sell, and when?
How do you know that can be right?
Be careful.
Here's where a lot of people don't do the thinking needed
to build a real operating plan around revenue.
Sometimes they just take the revenue they have
and then drag it to the right.
They click the little plus icon
and just drag it to the right, and they say,
"We're just going to grow 10% every single month."
That might be fine for a silly wild-ass guess,
but as soon as you can,
you're going to want to figure out realistic numbers,
and the realistic amount of time and effort to model that.
So instead of just saying 10% every single month,
you got to think about your inputs
that get you to your outputs.
How many leads do you actually have to talk to
every single month,
and what's your conversion rate?
How much do those leads cost?
If you can take the historical way you got customers,
think about the variables that go in,
and then use that to model it out and link it back to cost,
that is the best possible way
to do an operating plan around revenue.
That's the gold standard.
Now the only other thing you have to keep in mind
about operating plans
is that you need to treat it as a living document
that you try to manage to.
It's okay to get it wrong,
but you should keep updating it month by month
as things change
so you can use it as a barometer of where you're headed,
and if things are tracking.
It lets you find issues before they pop up.
So if sales are picking up faster than you expect,
the operating plan might help you realize
that you need to hire more people
in customer support, sooner,
otherwise your customers won't stick around
or have a good experience.
And vice versa, if sales or marketing is not panning out,
you might need to slow down hiring on that side
to reduce your burn and give yourself more runway
so that product and engineering can build a better product.
Use this document with your executive team
and your investors, or your board, if you have one.
This will allow you to walk into that meeting
with a clear picture of the business and how it's going.
In particular, a good operating plan
will give you a much better idea
of whether your startup can get
from the last gas station to the next one.
It's way better to see these issues months or years out
when you can fix them,
not when it's too late.
All right, so that's how you grow,
but I would like to note,
sometimes people spend a crazy amount of money on growth
when they don't have retention figured out.
What's retention?
It's how many of your customers stick around, and how long.
Retention's inverse is churn.
Churn is the percentage of people over a time period
who left and didn't ever come back.
If you had 6% churn in a month,
it means 94% of your users were retained.
Here is an amazing resource from Lenny Rachitsky.
You should go Google it,
and there's a link in the description for this.
It goes into what does retention look like
for different types of businesses?
Now let's break down the two types of retention
mentioned here.
First is user retention, sometimes called logo retention.
This means if a customer signs up,
how many of them are still using you six months later?
So if you just launched,
and you only have one month of data,
how do you figure out what your six month might be?
Let's say in month one, you kept 95% of your users,
then you can do 0.95 to the sixth power,
which equals 73% user retention at six months.
By all accounts, at that point, you'd say,
"Wow, I have something really special."
Across all the different types of businesses,
this is amazing user retention.
You might ask, why are there different levels of retention
for different types of businesses?
Well, it turns out consumer businesses
are just very different than enterprise.
The potential customer base for consumer is huge,
possibly even the whole smartphone-owning populace.
That means that you generally don't have to spend
as much money to acquire those users.
Think Facebook, or Instagram.
For enterprise companies, you need much higher retention
because it usually costs so much more
to get them in the first place.
That's why you need a sales team
and a lot of marketing budget.
Couple that with the fact
that there just aren't as many people in businesses
that might need that software,
well, that's why retention needs to be higher.
Think Salesforce.
Salesforce is a good example
of an enterprise business where that's true.
Now the other type of retention Lenny talks about
is net revenue retention,
which is measured over 12 months,
sometimes called net dollar retention.
It's less important for consumer businesses,
and a lot more important for enterprise.
Again, those businesses might have
an average revenue per customer of $100,000 or more,
and the cost to get them
is sometimes on the order of that much as well.
That's a lot of money to get one customer.
In those cases, you want to be able to land a pilot,
and then expand as the product works,
which is why the retention or the dollar amount
needs to be much, much better.
Snowflake is a good example of this,
and you can see how the market values
that type of net dollar retention.
Okay, now that we know what retention is,
do you focus on growth or retention first?
My recommendation is always to focus on retention.
Retention is the single key thing to showing
that a product or service actually works.
Did you actually solve the problem?
Did you actually make your user or customer happy?
If so, they're going to come back and keep using you.
If you focus on growth first,
and your retention is less than good,
you've got a leaky bucket.
You can pour all the users you want
in the top of the funnel,
but if they just leave, there's no way for you
to actually make a working business doing what you're doing.
Focus on retention first.
So you've got a plan, you've got retention,
you've even nailed growth.
If you can nail your growth and keep on the path
of triple twice, double three times,
you'll be sailing to an IPO just fine.
But along the way, basically everyone
gets punched in the face.
What if growth stalls?
What if something happens to you
along the way to your destination?
You might look down and find that you don't have the runway
to show the traction you need to raise the next round.
What can you do?
First off, get default alive if you can.
That means make money and get to a point
where you can survive without raising more money.
That's the number one advice we give,
though you'd be surprised how uncommon it is sometimes.
Some VCs only care about growth
and don't want you to be walking dead.
They'd rather you try to grow at any cost and die
than to stick around.
That's not me.
Personally, I think a good founder
can always find a way to keep growing,
and if you can get profitable,
you can often start cash flowing
and reinvesting in your own business
without ever raising any more money.
Watch my video on my channel
with Gobble founder, Ooshma Garg,
for a really good story about it,
link in the description.
If you can't get default alive,
you need to slow down to figure out a way to get there.
This is painful, so get ready.
It means a reduction in force and spend, layoffs.
None of this is fun, but you have to do what you have to do
to save your business.
Pretending the problem isn't there won't solve it.
If you have to cut, do it once,
and do it as deeply and as humanly as you possibly can,
just so that you can avoid doing it again.
Figure out a plan that's realistic and attainable
to get you to the next station.
Sometimes people want to stomp on the accelerator,
and the reality is I've never seen that work.
If you're in a car, and you're running out of gas,
you don't mash on the accelerator
to try to run out of gas faster.
You try to increase your efficiency by reducing your speed,
and you'd be surprised how often this can work,
especially if you need just a little bit more time
on product engineering
to Dow product-market fit,
or to pivot slightly to a different market.
Of course that leads to the pivot.
If none of these other options really pencil,
and you can't figure out how to do it
with this idea or this market,
you may well have to do a full pivot.
A good example of this is how Instagram actually pivoted
out of their previous idea.
They were actually an HTML5 clone of Foursquare.
It's kind of crazy to think
that that's how Instagram actually started, especially now,
knowing what Instagram is for society today.
It was an amazing decision.
Finally, one more thing you can do, and what you should do,
is actually talk to your investors
about a round extension for the last round.
If you've executed well but hit some headwinds,
you may well find this is a path you can explore.
Have a frank discussion.
Talk to investors one-on-one, and just see where it goes.
One thing to really keep in mind
if you're asking for more money
from existing investors, though,
is that you need to combine this ask
with some form of the other things we talked about.
Can you be default alive?
Or can you find a pivot that can show product-market fit?
Nobody will bridge you to nowhere.
So that's it.
First, you owe yourself a pat on the back
for watching this far.
This is the first step for you
to get the most out of your startup in your startup journey,
especially after you've raised so much money.
Congratulations, you raised a lot of money,
you have big dreams,
and now I hope that this video helped you learn a little bit
about how to make your dream a reality.
Let's recap what you need to know
now that you've got the money to build your dreams.
First, get your head right.
Every dollar has to pay back.
Then make an operating plan and manage to it.
Focus on retention before growth,
otherwise you've got a leaky bucket.
And finally, know you have to think through your options
even if things don't go to plan.
So often, they don't.
You've got this, there's a way forward.
Follow me on Instagram
if you'd like me to answer any questions
about what you just saw.
Thanks again for watching all the way to the end.
If you liked the video,
please click Like and Subscribe,
and be sure to hit the bell icon
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I'm super psyched that you are investing in yourself.
You're learning how to build businesses and startups.
And honestly, I really enjoy being on this journey with you.
I believe in you,
now let's go out there and change the world.
I'll see you next week.
(upbeat music)