Aug
21

Three Ways to Blow Your Venture Capital Round

Jack RaitonEntrepreneurs

From Adventures in Startups & VC blog

Only about 1 in 100 companies that pursue venture capital money get it. Probably the worst thing you can do right after the financing is then to blow this precious resource. Yet, there is tremendous pressure to scale the company for a large market quickly. Here are the top three catastrophes I have seen first hand and heard from veteran venture capitalists time and time again over the years.

  • Hiring the right CEO at the wrong time: Investors put money in the company to make money, and you do that by making a big company—fast. As soon as the round is closed, the new board of directors and the founders interview lots of candidates and hire someone who just amazes them with their vision and ability to grow a company quickly. That “professional” CEO starts hiring three to six VPs, they in turn hire three or four managers each; they then hire more staff. Headcount after a Series A grows two to five fold in a few months. That’s great if there is a rock solid foundation underneath the company, and it has equally strong ties to the market. It is a disaster otherwise, creating chaos, frustration, anger and tons of finger pointing. The new CEO takes a lot of the blame, but so should the founders and the investors. The CEO was probably the right person; the company should have spent three, six or more months refining the business model, sales process, marketing strategy, and product development process, as well as assimilating the people so they worked as a team, before hitting the gas.
  • Scaling the sales force prematurely: This mistake is similar and often related to #1, but it’s enough of a stand alone error that I put it in its own category. Venture investors look at initial sales traction and think the rest of the market buys the same way or has the same needs It takes a lot of market research to make sure you are ready to scale. “How many times do I have to learn this lesson,” one general partner recently said to me.
  • Building the product ad nauseum: If one is going for a big market, you don’t want to ship one that has bugs, right? That didn’t stop Microsoft—or many other successful software companies, for that matter. The trick is understanding what bugs will be tolerated by which portions of the market and limiting your sales to that segment until your ready for others. Lots of engineers absolutely hate that approach. With a lot of money in the bank, an engineering-heavy venture can be prone to come back to the board time and time again, saying, “we just need another quarter or two of development, then we will be ready for market.”

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