4 Finance Rules for Keeping a Startup in the Black
Rule one: Raise money when you don’t need it.
PHOTO CREDIT: Getty Images
When starting ThirdLove, my co-founder David Spector and I spent more than six months without any cash coming in. We were working crazy hours just creating product samples and building our app, which we funded using our savings. As you might imagine, it was a fairly stressful time.
Once we raised our seed round, we had the chance to exhale for a second. We were able to rent our first office and hire a small team. But that didn't mean we stopped focusing on our cash flow.
As a founder, you can never stop thinking about your fiscal situation and how to improve it.
Running out of money is unfortunately all too common in the startup world, but it rarely happens in a flash. Avoiding that situation is all about making sure you don't go too far down the wrong path--to the point where there's nothing more you can do.
Here are four finance rules I've learned to live by so a lack of cash is never an issue:
1. Raise money when you don't need it.
Many people think the rule of thumb is that you should start fundraising when you're six months away from running out of money.
Ideally, you want to start before that. You never should be raising money when you're about to run out of cash because investors can smell desperation a mile away. That means your valuation will be lower--and you'll end up giving away more of your company. Your power to negotiate goes right out the door because you have no real leverage.
Instead of making decisions under the gun, know there are plenty of ways to get more cash that don't involve venture capital. Partnerships, lines of debt, bank funding, and friends and family are all options. But you have to understand when you'll need money--and then make sure you have it before that time comes.
2. Raise more than you think you need.
I've never had another founder tell me, "I raised too much money."
Does that happen occasionally? Sure. But you're much more likely to run out of cash than you are to raise too much of it.
For example, we raised $4.1 million during our seed round. Afterward, I was wondering what the heck we were going to do with all that money. As it turned out, we absolutely needed it. We had issues with our original manufacturer in Mexico and had to switch production to Asia, which used up way more cash than we anticipated.
The truth is, you never know what's going to happen or what may go wrong. It's always a good idea to round up when fundraising.
3. Be super scrappy and don't spend money on things you don't need.
It's absolutely mind-boggling how much money some startups in Silicon Valley burn through.
I get it. We all want to have an offsite in Napa Valley for our 300-person team. That would be amazing--but also incredibly expensive. A startup is not Google, and it's simply irresponsible for a small organization to blow money like that.
Fiscal responsibility doesn't just fall on you. You want to teach your team to think about the company's money like it's their own. Get them in the habit of questioning expenses by having them ask, "Would I spend a thousand dollars of my own money on that? What's the return? Is there a better way to spend this?"
Success is about investing in the right things at the right moments, especially if you're not making money. You have to take a hard look at every single dollar and how you plan on spending it.
4. Establish a profitable business model.
If you look up "business" in the dictionary, the entry reads: A business sells a product or service for more money than it costs to provide it.
Sounds pretty simple, right? But if you don't inherently understand your cash flow, and can't predict it accurately, then you don't have a handle on your business.
Most companies don't make money right from the start because they don't have scale. If you're going to be a founder, you have to map out how you're going to get to the point where you're making money--even if you aren't bringing in any cash right now.
When you're profitable and you make money, you don't have to raise it. Suddenly, you're not constantly beholden to the next funding round. While you may have to make some hard financial choices along the way, I promise it's worth the struggle to understand your cash flow and feel in control when fundraising.