Founding a startup is one of the most exciting things you can do in your career.
Nonetheless, startups usually need an influx of capital in their early days. This can come from personal savings, banks, friends and families, angel investors, accelerators and venture capital funds.
If you raise equity funding (money in exchange for owning part of the company), the first ‘round’ of funding is usually named pre-seed: it’s the small investment you need to get started. It can range from a few thousand dollars to a few hundred of thousands.
This investment needs to get you to either:
- profitability
- the next round of fundingIf you’ve done your homework, you’ve planned the above: you roughly know how much you need and how long it’ll last for (=runway).
The path to profitability is different for each business, so we’ll focus on getting to the next round of funding: seed.
Planning
The famous SaaS napkin shows what you need to prove across product, team, traction, etc. before you can raise a seed round. And so your pre-seed money should be invested to deliver those proof points.
Like a lot of things: it’s easier said than done. Within the next few months, you’ll likely pivot, start from scratch, shake up the team, win some customers, lose some and many more unplanned events! The financial forecast you built at the beginning will be completely off from reality.
I think of it in terms of stages:
1. Get the right team
2. Build a product that delivers value
3. Show good traction
You can’t do 3 without 2 and you can’t do 2 without 1.
1. is usually taken care of through your founding team, as long as you don’t lack any critical skills (eg. technical person). If you do or if you’re a solo founder, accelerators like Antler can help you build your initial team.
2. can take time. Whatever amount of time you think it’ll take to build your product, multiply that number 2–3x as it’ll probably take more than one try to build something people want.
3. can also take time. Whatever growth rate you think can deliver, divide it by 2x as you’re likely too optimistic. You also have to budget the cost to acquire customers. Individual users can be acquired for a few dollars, enterprise customers can be a few hundred to a few thousand.
Spending
Where does the money actually go? People mainly. Whether you have the necessary skills on the team or you have to use external contractors or agencies.
In the pre-seed stage, founders usually pay themselves a very small amount (sometimes, nothing at all), around or below the $50k mark. Paying yourself too much isn’t smart: you reduce your runway and it’s a red flag for investors (do you do this to build something big or just to collect cheques until there is no more money?).
Aside from people, money will often go into marketing, to acquire users/customers and show traction. Spending $30k a month in marketing is probably too much at this stage but a few thousand dollars can still make a big difference.
You should not be spending on marketing until 1) you have a working product that delivers value 2) you know where and who to sell it to. The only exceptions would be to test demand for a particular product hypothesis or experiment with new acquisition channels.
For accounting, legal, insurance, get the bare minimum and use third parties — your own time should be focused on building your business, not doing admin. Many firms offer startup-friendly rates which are cost-effective. Through your accountant, leverage the R&D tax incentive to get some ‘free’ money.
Ultimately, you want to go fast but you need to account for a margin of error. It will rarely go as fast as you want and you don’t want to run out of money while you’re on a good trajectory.
Author Bio:
Despite a master in computer engineering, Paul Boudet is an award-winning marketer with 10+ years of digital experience in Paris, London, San Francisco and Sydney. Paul has worked for incredible startups across Europe and Silicon Valley, including IMVU, founded by Eric Ries author of ‘The Lean Startup’, and Ometria, one of the fastest-growing tech companies in the UK and helped it scale from 5 to 100 staff. Looking for a new challenge and better weather, Paul moved to Sydney in 2018 and co-founded Meetric in 2020, a tech startup building products to have better and more productive meetings.
