With the news of a new startup getting funded every now and then, we start believing that getting fundings worth millions and billions is actually not that tough a job. But, you're mistaken. While getting someone to trust you and invest a part of his money in your idea is for sure a tough job, what's tougher is making sure to spend that money judicially for the good of your startup.
It has often come to notice that many startups who were doing exceptionally well for them before the funding, just lose their way after funding. This is basically because they start behaving as an unsupervised kid in Disneyland. They start spending on things like office upgrades, unnecessary technology tools and various other unproductive things that are totally not needed by the startup at that point of time. They spend on these things just simply because they can.
According to industry experts, the first million (Rs. 6.4 crore approx.) is like a cushion foundation on which your startup's future is built. It is also the basis on which the future funding rounds of the startup will be based. Hence, the sane thing to do is not to spend on unnecessary things like a fancy office with a fancy coffee vending machine but to invest that money in making your product/ service better.
Further, they can also make use of the money to take special care of their current customers. A part of the funding can be used to establish a customer care service for the customer. After all, if the customer is happy, you're happy.
As per Sahil Lavingia who is founder of online startup GumRoad - "allocate 99 percent to people, and maybe a little bit to server cost."
"People should be the only expense at an early technology company...You're not providing a human-powered service, you are building products. Products need code to run, not money," he added.
So, spend your funding with care because if the story of rags to riches is true, so is the story riches to rags.
Unfortunately, large capital raises often result in the money being spent less efficiently.
Investors who make large investments often place pressure (subtle and otherwise) on startups to"spend the money and get big, quick." Such an environment can lead to bad decisions, including hiring ahead of needs, ramping up for an unrealistic level of product adoption, etc.
A realistic "use of funds" is essential component of your 'Plan'. It should be tied to major milestones and the impact of such milestones should be baked into your financial pro formas.
As an idealistic appoach, an early stage startup should invest the money raised in its very first funding in :
(1) Hiring the right team for the business
(2) perfecting the product, which may involve re-engineering
(3) Customer Acquisitions and marketing.
Online startup Quora's Co-Founder Adam D'Angelo gave a good breakdown of what Quora will do with its latest $50M in funding
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