The market today has a lot of activation energy, even as the pandemic continues to play out. We’re seeing ample capital, a focus on distributed investing, more first-check investors than ever before, and, fittingly, a parade of new startups.
That said, momentum has a way of overwhelming even the most ambitious. For founders at the earliest stages of building a company, it’s imperative to spend in a balanced yet growth-focused manner. At TechCrunch Disrupt 2021 last week, Harlem Capital’s Henri Pierre-Jacques and BBG Ventures’ Nisha Dua explained how founders should allocate their recently raised dollars in today’s environment.
Personal finance — even for founders — varies for everyone, but the investors drew from their experience with their portfolio companies and their own ethos to give general advice on everything from the importance of an emergency-day fund to how much energy to actually put into hiring new talent.
Hiring 101
Dua addressed the elephant in the room right away: Hiring. As we’ve seen, hiring has always been hard for startups, which are more strapped for resources than, say, a Facebook that can offer an engineer a $1 million signing bonus without blinking an eye. Founders and investors tell me that hiring is only getting harder as an increasing number of well-capitalized startups are rising up with impressive valuations.
Dua feels it’s right for hiring to be at the top of every founder’s list, but she urged those listening to start by thinking backward.
It’s easier to raise and harder to spend these days, because there’s such a high demand for talent. The answer for where to spend is going to be different for every company across many different industries.
I think a lot of us would admit that we’re not really great at planning or budgeting in our own lives. But we have to be great at that for our companies to succeed, to grow and to get to profitability. And so what we like to sort of challenge founders on is, ‘Can you articulate your North Star? And then what is your plan? And is that plan executable to get to that North Star?’ That’s really where the plan for how to spend comes in. You’re not going to reach that North Star in the first 18 months after your first check, obviously, but you’re going to have a set of milestones that get you to the first hurdle.
[So, think about] the things that are going to make this company most successful in the pursuit of achieving that greater North Star? Hiring is certainly going to be at the top of that list.
Pierre-Jacques drew from his portfolio company, Miami-based Pangea, which recently raised a $70 million Series B, to illustrate one way he’s seen entrepreneurs navigate the talent wars. In short, founders should permit themselves to step away from the hiring process.
I think what they’ve done really well, and a lot of companies don’t do as well or are fearful of, is getting recruiting agents and agencies. With hiring, you want to be a part of the process. But in this market, where talent is so hard to get, it’s just there’s a lot of work and a lot of time for founders to spend all of their energy and not use other people. Typically founders, early on, [may raise] a $3 million to $4 million seed round, and a $30,000 fee to agency may feel like a lot. But your time is just so valuable. The Pangea founders realized that their time was just worth more than saving those dollars on agency.
Secondly, our best companies are going international from a tech talent perspective. Pangea is opening up an office in Lagos, Nigeria, with roughly 40+ engineers based there. Getting engineering talent abroad saves you capital, but also allows you to scale and expand. We’re definitely seeing Lagos, Eastern Europe … in like Venezuela and Argentina, probably at the top four or five countries where we’re getting a lot of our engineering talent from.
Emergency-day fund
While hiring and marketing costs may take up the bulk of capital these days, the investors agreed that runway should continue to be a priority for founders.
Adding to the savings conversation, Dua said that founders should similarly prepare a rainy-day fund for non-obvious expenses.
You always need that extra buffer in your pocket. When I asked founders what the one piece of advice they wish they’d had for their first check, Brian Bordainick from Starface said, ‘I would always advise founders to actually have 20% to 30% of capital squirreled away for the thing they didn’t expect coming.’ I thought that was a really interesting piece of advice, because that is not a small amount of your overall fundraise when you’re thinking about 18 to 24 months [of runway] and getting to the next milestone. But I think it’s an interesting note for founders to think about at the risk of maybe of being too conservative, but to squirrel away just a little bit of that extra cash for the unexpected.
The pandemic is one example of how uncertainty can make or break a business, but Dua said that founders can be impacted by things like cadence of the year, holidays or even news events that take over the conversation.
I would say the unexpected thing that’s happening right now for consumer businesses is iOS 14. Companies are really, really challenged in the face of that. In fact, they maybe have too much money to spend on Facebook and find the efficiencies there. Now, they have to put that money into other marketing channels. So [it] never, never hurts to have a little bit of a rainy-day fund or at least be planning for these. With delta, we never know what’s going to happen. Hannah Donovan, who sold Trash to VSCO, actually mentioned the “unsexy” stuff to me — the things you don’t plan for, like your 409(a) valuation [and] your legal expenses. I’m an ex-management consultant, so maybe I overplan in this process, but I think this is where founders can get stung.
When being conservative is in your blood
What if you aren’t armed with hundreds of millions in venture capital in your earliest stages? Crunchbase data shows how uneven the investing boom has been, which disproportionately hurts the amount of dollars going toward women and historically overlooked individuals.
The data isn’t a surprise to Harlem Capital and BBG Ventures since both firms focus on minorities as part of their investment thesis. Instead, it has been an experience that has shaped their own advice on how founders should spend. After all, the ability to raise a first round, let alone a follow-on round, isn’t a given.
Pierre-Jacques summed how the dynamic impacts fundraising perfectly:
It’s a generalization, but a lot of minorities? We don’t come from money. A lot of us can’t do the family and friends round, right? So you kind of had to bootstrap or you had to focus on higher profitability margins before you got into VC funding. So there are these nuances of understanding where certain groups come from. We now have 38 founders who are diverse. How do we get each of them to share their experiences and really curate that mindset? I think there is value in being conservative and understanding, “Hey, I want to have 30% reserve or, you know, I’d rather take on more capital and slightly more dilution.” But, there are also downsides to that. I think you just have to understand the pros and cons of both sides.
People who have historically not had access to unlimited money may naturally go the conservative route. Here, exposure (and permission) can make a massive difference when building a company. Pierre-Jacques learned firsthand how important it is to think beyond where you’ve learned to naturally go.
Even for me, as a GP, I am more conservative. So when we were raising our second fund, me and Jared, my partner, had many discussions on [if] we want to triple the size of our funding from $40 million to $134 million. And we were having conversations with some of our investors at TPG, and they were like, “This is what capital allocators do.” Even for me as minority fund manager, hearing the perspective of, frankly, white men who are managing billions of dollars and how they view raising capital, opened my perspective to like, “It’s gonna be OK. We don’t have to stick in the sweet spot.”
I think for a lot of founders, in the same way, you’re scared of what it means to raise $70 million. It’s a lot of money. I’ve never seen that, let alone how to deploy it. There can be a fear about that. So I think it’s understanding that it’s okay to have that; understand your path, but also, let’s expose you to some people who’ve done it, and then you can make an assessment for yourself if you want to take that risk or not. Right? So not all minorities are conservative — that’s a generalization. But I do think broadly, because of where we come from, we don’t just think we can raise a $100 million Series A. There’s not a lot of us who’ve done it, and so it does take some discussion to get you comfort around that and what that means.