In a 2018 article, the New York Times details how startups raising $100 million or more from investors, in what’s known as a “mega-round” in Silicon Valley, used to be rare, but has recently become relatively common. In fact, according to data from PricewaterHouseCoopers and CB Insights, global venture capital funding reached $207 billion in 2018.
That’s a significant amount of money floating around. So, what exactly does a startup, presumably one accustomed to making more with less, do with an influx of $100 million? Or even of one million? We asked, and eight founders were willing to share with Business Insider the biggest steps they took throughout the fundraising process. Here’s their advice for entrepreneurs looking to allocate their money wisely.
In advance of even starting the fundraising process, Jordan Jones, founder and CEO of the lifestyle gifting company Packed Party, first created a roadmap that detailed how she’d deploy the over $2 million in capital she ended up raising. “It takes so much money to make money, so being organized and having a list of what things needed the most capital, and how quickly, for my business was critical,” she explained. “I needed money to make more products and also needed smart people on my team to help get it done alongside me. Both required capital and when looking at my laundry list of needs, these fell number one.”
Many founders touted the importance of prioritization when considering how to use your funds.
“After my last round of funding, I focused on the one thing I knew we needed to drive growth: building a superstar team,” said Cat Chen, the CEO and founder of clean fragrance brand Skylar who raised $11 million in seed and Series A rounds. “Prior to our last round of funding, we had a team of five, and we are now a team of 20. Initially, we built up our operations arm, then our marketing team, and finally, filled out our sales division.”
Trisha Roy, CEO and founder of window-covering company Barn & Willow, raised $1.5 million in initial seed raises and said that, depending on the industry and how much is raised, anywhere between 20 and 40% of the initial raise could be allocated toward hiring. But, she cautioned not to over-hire. Instead, map out the needs of the hour to scale conversions, sales, revenue, downloads, sign-ups — whatever the metric most relevant to your company for the next phase of growth is — and budget toward it.
“Since we were building a direct-to-consumer brand, establishing a brand voice and a brand identity was critical,” Roy said. “So, our first few hires were for brand marketing and influencer marketing. Customer success was the other team we invested time, budget, and resources in right when we closed the seed round. We wanted to be ready for growth, and these initial hires helped with that.”
For Meika Hollender, cofounder and CEO of Sustain Natural, an all-natural sexual wellness brand with over $10 million in funding that was acquired by Grove Collaborative in August 2019, one strategic hire, versus a team, proved most important.
“After we closed our Series A, I realized it was time to hire an experienced COO and partner with someone who could really help me run the business effectively,” she said. “Of course, and this needs to be clear, it’s the entire team that made Sustain successful. But, when you’re just starting out, partially due to being in the midst of proving your business model and partially because of funding, it’s challenging to get really experienced leaders to join you. Having someone to truly lead the company with me, help with managing the team, and allow me to actually take a few days off here and there while knowing the business would move forward, really made a difference. It was the best decision I ever made.”
And still, others chose to invest first in processes to support the current staff. For Vanessa Dew, who has reportedly raised nearly $50 million as cofounder of the tea drink company Health-Ade Kombucha, that meant upgrading operations. “We were at capacity and overflowing with orders, and we needed to build the product to fulfill all the demand,” she said. “We bought machines, built out our new brewery, and then ultimately hired people for specific operational roles.”
A smaller amount of money for Dew, but still a “good amount,” went to Health-Ade Kombucha’s design agency to elevate the label with fun colors, big fonts, and an aesthetic that allowed Health-Ade to stand out on the retail shelf.
Non-toxic cleaning label Blueland launched with $3 million in capital from a seed round led by Global Founders Capital and included investments from Comcast Ventures, Brian Lee (of the Honest Company), Nicholas Jammet (of Sweetgreen), Nick Green (of Thrive Market), Justin Timberlake, and more. After the raise, Blueland cofounder and CEO Sarah Paiji Yoo used some of the money to hire new team members and for product development.
“Both are so foundational to everything we do and to scaling our operations,” she said. “We are unique as a direct-to-consumer startup because our R&D is conducted in house out of our own lab in Montana. We have 16 patents pending, and it’s growing, so there are meaningful legal costs associated with supporting our IP strategy.”
But, she also put money in the bank — and quickly realized that money could be earning interest.
“We shopped around for savings and money market accounts to find which banks offered the highest interest rates,” she said. “The difference in annual income we could earn just from interest rates could support one or two full-time hires, so it was definitely an area worth spending time on. We also decided to get on Carta to help manage our cap table, issue securities, get 409A valuations, and stay compliant. It has already saved us thousands of dollars in legal fees and dozens of hours of my team’s time.”
And, she explained, you’re a stronger candidate for venture debt when you’ve just raised capital and have a large amount of cash in the bank. Venture debt can sometimes be a cheaper way for businesses to access additional capital for areas like inventory. “We spoke with a handful of banks to understand our options,” said Paiji Yoo.
Even when it feels like the sky’s the limit when you’ve locked down a lot of funding, it’s smart to be fiscally conservative in the early stages of a business.
In December 2017, Daily Harvest, an organic, chef-crafted food delivery service, announced a Series B funding round of $43 million, led by Lightspeed Venture Partners and VMG Partners. Daily Harvest has also received investments from A-listers like Gwyneth Paltrow, Serena Williams, Bobby Flay, Emily Ratajkowski, and Haylie Duff.
“The biggest step I took after raising our Series B was to show everyone in the company that raising more money doesn’t mean that we spend any differently,” said Daily Harvest founder Rachel Drori. “I continued to focus on capital efficiency and operated the business with a disciplined approach.”
Adam Ross, cofounder and CEO of skincare destination Heyday, used roughly 50% of the money from Heyday’s $11 million capital raise to build more brick-and-mortar shops and another 30% to invest in his team through things such as talent acquisition and management, human resources, and operations. The rest went to data, content, and initiatives.
But, he warned, “Lots of capital can make you lazy, and you can lose the entrepreneurial hustle and agility that got you there in the first place. It’s important to keep reminding yourself of this when it comes to allocating your money. Just because you have it doesn’t mean you need to spend it.”