The Problem with Relying on Investors: A Startup Story
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Startup culture will almost always include a certain amount of chaos. The product can change, the people can change and funding comes in waves. Thanks to the model of funding startups through VCs, a company can have zero dollars in the bank one day, and millions the next. But what happens after startup leaders spend that big chunk they earned in the first few rounds of funding? This is where the trouble can start.
I admit, this is a bit of an unusual post for me. Rather than share tips on SEO or talk about the life of a remote worker, I wanted to use this platform to speak out on things that are ineffective and unethical in business.
So today I want to talk about the problem with startups that rely on investors for funding.
The double-edged-sword of investors
Startups come and go. They are often based on some new big idea, and often that big idea just doesn’t work. Or maybe the company was poorly managed, or it ran out of money. In the startup world, it’s common practice to grow (or start) the company by seeking outside investors. Investors will contribute funding in exchange for equity in the company. This can be a good thing, or a bad thing, depending on how it’s done.
Some startups raise too much money too early. Having that cash on hand is good, but some companies will blow through a large investment too fast. What do they do then? Well, they probably will raise another round. When startups depend too much on the next round of funding, it can be easy for company leaders to lose focus. When you have a good product and branding or marketing strategy, you don't need to raise past Series A.
I'm not against fundraising, but companies need to be clear about the reason why. If you raise money to expand on a good strategy and keep scale profits, that’s a good business strategy. But when you are raising money just to survive, with no solid plans to start turning a profit, this is a problem.
Part of the reason I wanted to write about this topic is because I have been hearing about some terrible business practices on the part of startups in Europe.
Some company leaders will use fundraising as a way to get a quick infusion of cash to pay rent, or make sure salaries are covered. The problem comes when you do this again and again. The funding is there to get your company to a point where it’s turning a profit. But if you’re not turning a profit and you can’t pay the bills, well then you have much bigger problems than just needing more funding.
This approach to financing a company can lead to a lot of other questionable practices. For example, I’ve heard stories about startups in Europe firing people just before they reach the six-month mark of their employment. These companies will then hire a new batch of employees to replace the people they fired, and do it all over again in six months.
They do this to work around European labor laws that state you become a permanent employee after six months. When you're a permanent employee you're basically protected as companies can't just fire you willy nilly. If you're still within your six-months probation period, they can fire you anytime with a 2 weeks notice. I've seen first hand where companies hand the 2 weeks notice right before the 6 months mark. I think this is a very poor practice, and should be illegal.
Startups will always be looking for ways to save money, and they do typically pay less. But the startup culture is demanding. You have to hire people with intense passion for the work and the company. Startups who routinely hire and fire people to save money cheat themselves out of benefits that come from having a dedicated, talented team. Startups need people who are willing to put in those nights and weekends to make the company succeed.
So, what’s the solution?
If a startup is low on cash, I think they should go ahead and raise the money. You don't want to have your company go bankrupt!
Once that is done, sit down and find out why you're not making a profit. Look at your Key Performance Indicators. Do you have OKRs defined? Do you have a good marketing strategy? To create revenue, you have to have a good marketing person. If you're selling something, you have to have a good sales team.
Startups can use this as an opportunity to be more efficient. Can you save money by consolidating technologies? Do you have too many people doing the same thing? If you're hiring too much, hiring too aggressively or hiring the wrong people (see above) this can be a huge drain.
As a consultant who frequently works with startups, I always look at the health of the company before I sign on. There are a lot of ways to do this. I like to research the company on Crunchbase and compare how much they've raised versus their annual revenue. LinkedIn Company is also a good resource; you can see whether they are hiring aggressively, or if a lot of people have left recently. And when I talk to the C-Level (or the hiring manager), I always ask them about their vision for the company. If they can answer it’s a good sign, it means they are going somewhere. If they can't speak to the vision, you can bet that the employees will pick up on that and won’t be motivated to succeed.
Startups can still be a great place to work
Being part of a startup, whether as an employee, a consultant or launching your own venture, can be a rewarding and exciting job. It can also be challenging, as you never know what will happen in the long run. Personally I think it is worth the challenges, provided you don’t end up with a shady company that relies on fundraising and doesn’t treat its employees well.
Do you have a startup? Have you worked for one? What do you think about all this? Please let me know in the comments!