Recently, a fairly well performing and very well funded company had to implement some tough cash-constraining tactics to steady the company’s viability. That prompted me to think about how important it is to stick to the basics of prudent stewardship of capital and to principles of creating a “long-term” viable entity.
Whenever an entrepreneur accepts capital to help grow his or her company, it’s important to be a good steward of that capital. Investors trust the people in whom they invest to act prudently and strategically.
This doesn’t mean that investors don’t expect mistakes, or that investors aren’t forgiving. What is important is that the company’s founders are financially prudent, avoid getting caught up in the euphoria of having lots of cash readily available and allocate funds for the unexpected storm or catastrophe. One thing you can expect: The unexpected will happen!
Here are some tips for prudent use of investment capital:
Tie funds to projected cash flow
This is your map for gauging progress, and making adjustments.
Never, never run out of cash and put your company valuation in jeopardy because you are forced to raise another round of capital with weak financial statements. If your company has only six months cash in the pipeline, it’s time for urgent action.
Make your priorities balanced
If your priority is product development, be mindful of the importance of sales and marketing for revenue generation. Or conversely, if your focus is sales and marketing, be mindful of customers’ changing needs and your company’s ability for continuous improvement and product iterations.
Funding allocations should reflect alignment with investors
Investors are providing capital to help scale the business, and mutually benefit with the founders on a successful rate of return. That means they expect salaries to be modest and that founders receive equity to capture the upside on the growth of the enterprise value.
Investors prefer founders who are motivated by increasing stock value.
Set realistic milestones; constantly check your team’s actions against those
There may be other interesting market opportunities to explore, but beware of going down rabbit holes.
If your milestone is to gain five large business customers or increase revenue by 30 percent, but your team wants to chase a new product line that requires an intense amount of resources to explore the unknown, you will have redirect your team. Hold them accountable to the milestones the company needs to attain.
Be in touch with customers
You have heard the adage, “never assume.” Don’t assume you know your customers’ needs or wants. You may have done market research with focus groups and test campaigns prior to starting your company, however, customer needs and wants change, and your competition may find a better solution.
Essentially, keep your eye on the ball and stay ahead of the game.
Accepting capital from investors usually comes with strings attached for prudent stewardship of resources. Those strings help founders build a successful enterprise and lead to wealth creation for everyone — investors, founders and employees.
Catherine V. Mott is the CEO and founder of BlueTree Capital Group, BlueTree Venture Fund and BlueTree Allied Angels located in Western Pennsylvania. As one of the more than 370 professional managed private investor networks in the U.S. and Canada, BlueTree Allied Angels has invested more than $27 million in 43 regional startup companies.
