How NOT to spend your first $250,000 round of funding

this video was brought to you by it's like being a platform for startups and small businesses to create professional investor decks and sales presentations get one free month by signing up at slight been calm /youtube balancing burn rate and runway in a start-up is probably one of the most critical tasks a CEO must deal with I have a policy of keeping everybody in the team up to date on how our bank accounts are looking but day to day or even month to month decisions on expenses still depend mostly on me now it's no secret that startups operate at a loss for quite some time how fast you become cashflow positive it varies significantly from company to company with some starters achieving break-even point in the first few months after launching we did it back in 2018 and others like Twitter are still struggling to do so even after an IPO often they end up featured in company forensics we have a policy of sharing some of our finances and our lessons as part of our transparency marketing we started doing this back in 2015 inspired by companies like buffer and Baer metrics whose own blog posts and materials were an inspiration to us so in this video we are gonna take a trip down memory lane to understand how sly bean was formed where the first money came from and how we spent it this is the story of our first $250,000 [Music] super-early funding we officially started working in slide being around May 2013 which puts us at around seven years since we started the company it's pretty crazy this is where the first money came into the company in May 2013 we invested sort of 35k myself and Kedah Ventures who are like our executive co-founders and this was so like a founding round it's not even a friends-and-family round in November 2013 we got $70,000 from startup Chile and from a Costa Rica's seed capital fund both were equity free government grants in May 2014 we got $25,000 from dream Adventures as part of their New York accelerator and then in September 2014 we raised 100k by 500 startups finally in January 2015 we raised our first actually invest around $250,000 led by Kara ventures ed Harris ventures and dream adventures now in 2016 we raced another po seed round but that's the story for another day months zero to six from mock-up to the first beta we were in Costa Rica for this part believe it or not the first slide MVP took around two weeks to make we built a Squarespace landing page with a quick explainer video and a fake signup button just to measure people's interest then building our first actually usable product did take a few months there are three things that I believe we did right during this period which were critical to getting us to where we are today so here's what we did right number one assigned salaries early on from day one all three co-founders had a designated salary I believe this is fundamental to a company's success and very often overlooked I've seen many starters that agree not to have a fixed salary and simply cover living expenses for the founders and this approach can lead to very awkward discussions where a founder needs to fly to visit their family for Christmas or buy a present for their significant other and does that qualify as a living expense even if it's a small symbolic amount I think that everybody needs to have some money that they can spend without having to explain themselves to the rest of the company number two same salary for all founders now for most of the early company track we greed that all three founders were to be compensated equally this created a sense of transparency and equal commitment among all the three of us we all should be working as hard as we can and nobody should make more money for doing so we also decided that if the company could not afford salaries in a given month we would delay that payment until we have some money in the back thus if we had to use our own credit cards or our own savings or borrow money to get through the month we knew that we'd eventually be paid back and then our 50/50 focus approach if we used our initial cash to work on sliding a hundred percent of the time we would have been broke before we could raise any money so this is why we decided to use part of our time to do some consulting work during the early stages of sleight being we made around five thousand dollars a month in projects for third parties including online marketing and some web development we probably used forty to fifty percent of our time and consulting work and use the rest of the time to work on slight pain this allowed us to work on the tool without burning through our cash to fast eventually we hired a junior developer that took care of most of that consulting work while leaving hose our CTOs schedule around 90% clear to work on slight pain this was a product intensive period and this is how the financials looked months six to twelve from beta to 1.0 this part of the story happens mostly in Chile so startup Chile is an early-stage accelerator that offers an equity free grant of around $35,000 it's in Chilean pesos so it changes now your team is required to move them to Santiago for six months for the course of the program by the time we got accepted we already had almost finished building our first beta so we launched that before relocating to South America being a government grant the use of funds was pretty rigorous aside from the initial cost of flying to Santiago our burn rate ended up looking something like this we decided to keep one staff member not a co-founder in Costa Rica to continue working on the ongoing consulting work we had which was supervised from Chile it was clear that we wanted to dedicate 9% of our time to slight pain but with around $10,000 a month in expenses we needed to keep some of our consulting work to avoid running out money too fast our time and start chilly was critical to start testing our product with the real potential users our advertising spend went towards signing people up and checking our onboarding process we signed up around 5,000 users during this period and started testing our business model since we haven't had time to implement a payment gateway we actually tested our subscription model with a fake pay wall if a user needed a feature we were planning to charge for they'd get a message asking if they wanted to subscribe for five dollars a month if they click to proceed then the feature would be unlocked automatically again there was no pay wall behind this but we would find out about their willingness to convert and using this approach we discovered that around 8% of our active users would take the click which gave us some insights as to how our business model was going to work towards the future so what we did right during this time focus on user tests and gathering their feedback we were able to get cheap signups with facebook ads and we monitored their behavior closely we dedicated 100% of our time through sleeping and the fact that we moved to the same apartment was critical for this and then keeping consulting work back in Costa Rica allowed us to help sustain our operation cost a separate staff handle that so the core team would not be distracted from our sleeping product experimenting with the business model early on and getting some very early conversion rate numbers what we did wrong we didn't start charging for the platform I believe that this could have boosted our traction significantly and I look back at this as one of our biggest mistakes implementing our payment system should have been a priority the feedback we received and prioritized came from users but not from customers again because we didn't have a billing system also we didn't experiment with different customer acquisition channels while we spent some money on Facebook ads a lot of it went to students who we layer discovered weren't willing to pay for our services our current acquisition cost is very different and we could have had a head start in optimizing that months 12 to 16 are launched and first customers and most of this happened in New York so we had planned to become a US company all along this is why halfway through the startup Chile program we started applying to some US accelerators we were accepted in Dream adventures in May and then located to New York I have a whole video on startup accelerators I had been through a startup accelerator on my previous company and I still felt it was important to do it again mainly for two reasons one so my co-founders could experience this crash course two accelerators in the end are very high-speed crash course on how startups work and to to have a connection in the u.s. we are foreign founders and just landing at JFK with no connections means a slow start an accelerator would solve that allowing us to build a network connect to investors and press faster similar to what we did in Chile we decided to launch the platform in the first few weeks after the program started so we were able to get a lot of press attention about our launch precisely because it was linked to us joining an accelerator in the city our financials during this period looked something like this now even though living in New York was significantly more expensive than living in Santiago or in San Jose we were short on cash and could not afford to adjust our salaries yet the company did pay for our apartment though well I had been focusing on the marketing slash growth during the previous period in Chile we wanted to leverage dream its network as much as we could to get in front of investors so we hired a good friend of mine to manage our press and our marketing efforts during this time so that I could focus on investor meetings and fundraising and this was a big mistake that could have cost us our company fundraising is an exhausting and honestly discouraging process you pitch your life's project only to get rejected 99% to 100% of the time it's like high school dating in our case we've made the terrible mistake of spending 25 percent of our team's time in trying to raise money when our company was far from ready to do so with a recently launched 1.0 version we were making around $1,000 in monthly recurring revenue being these our first thousand dollars in revenue we felt that this was enough proof that our business model made sense but we were wrong so here's what we did right we kept our burn rate low thanks to our Costa Rican operation which at this point was pretty much a self-sufficient we did leveraged remit for press and to get a lot of relevant interest to investors some of them who ended up investing in the company a few months later what we did wrong we spent or wasted too much time trying to raise money when her company was just not ready for it we spent three thousand dollars in fundraising trips to Cali and to Philly we didn't spend enough time money or effort trying to reach relevant Emmer our metrics and like I said it almost cost us our company months 16 to 20 pivot and growth finally now this part of the story happens in Silicon Valley and I don't tell the story very often but when we got accepted into the 500 startups accelerator we had about two weeks of runway of money in the bank I was bringing the ill news to my co-founders when the acceptance email came in now 500 startups as absolute focus on growth was vital to bring our company to where it is today during this process we pivoted our target audience from our initial consumer market focus to a b2b play for small businesses and startups so pretty much what you see today this happened thanks to our weekly meetings with the staff and their endless and often brutal push to rethink our business they turned out to be right now their investment was also the first significant pile of money we have raised it gave us some peace of mind and some flexibility to start spending more money in discovering our growth channel and measuring our cost of acquisition at LTV so what we did right we pivoted our business model into b2b changed our pricing plan significantly we actually increased our pricing by 5x as we moved into these start of major leagues we disconnected slide being completely from our Costa Rican consulting operations that company became a separate business altogether we had a deep focus on acquiring customers so we finally nailed some positive unit economics that means the cost of acquiring a customer is less than the money that we make from that user and then we found some good acquisition channels mainly through Google search ads we also hired a customer success person who was key to increasing our conversion rates she also let us discover how much we needed a direct line of live support and live conversations with our customers we didn't waste a single minute trying to raise money we had a hundred percent dedication to the product and to growth so what did we do wrong during this time well after the program ended we couldn't retain our customer success person and we were first to making the opening never underestimate the time needed and the cost of replacing someone especially at those early stages we also came into the program at an earlier stage than other companies this meant that we have to play a bit of catch-up during the accelerator to avoid being the less relevant company in demo day months 22:24 our first investor round and how to balance growth and spend one thing was evident when we finished our 500 startups process now we were on our own growing our company and pushing the bar every month was entirely up to us now we were able to secure 250 K seed round and we expanded the company to six full-time employees mostly based in our Costa Rica office we kept a New York co-working space where I would still spend around 40 percent of my time mainly to keep our investor and our content network active for the upcoming fundraising efforts this also allowed us to officially remain as a New York starter while keeping our costs down it's cheaper it's actually cheaper to fly to New York one week every month than to actually live there now the challenge for any startup at this point is balancing net burn and growth there are two extremely different approaches that a company can take at this stage on one side you have minimum spend and slow growth so for companies running low on cash reserves and seeking to break-even as soon as possible you have to go with a route that means low to no spending on growth experiments and no new hires on the other hand maximum growth spare no expense approach this is for companies that assume that they can raise their next round of funding and are pretty sure that they will be able to do so here there's really no focus on reaching a break-even point on the contrary the priority is continuing with accelerated growth to engage future investors if the growth is great investors will come which is kind of true but I believe that neither approach is ideal on the first hand investors expect fast and dynamic companies rather than save strategies they've already invested and assumed the risk of funding is started a company with such slow growth will not give them a substantial return on their investment on the other hand focusing exclusively on revenue growth without paying attention to the net burn rate makes the depend on future rounds of investment which might or might not come in time through 2015 and 2016 we saw at 20 percent month-over-month revenue growth and we achieved this by repeating this approach step 1 experimenting with a bunch of different acquisition channels 500 to 1000 dollars on a test number to carefully measuring the cost of acquisition and lifetime value of each Channel number 3 once a channel is confirmed as profitable that means that lifetime value is bigger than the cost of acquisition we double the investment in that channel and continue monitoring it to ensure that that 2.5 X is maintained we do that until that channel is depleted and then start over we have a full video on that story so check it out now like I said we find good and profitable channels that we continue investing in until that channel becomes depleted and that's where more spending results an unsustainable cost of acquisition cost these channels are the main drivers of our monthly growth now we actually released our actual financial records for the year 2015 our goal during this time was keeping our burn rates between $15,000 and $20,000 now remember that we had just raised around the purpose was investing this cash in growing aggressively a monthly burn rate of 15 K to 20 K meant that the money we had just raised would last for around 15 months or so as our revenue grew from $3,000 to $20,000 a month in the span of these 12 months we expanded the team always keeping an eye on the monthly burn and not allowing that to exceed 20,000 by 2016 we reached around $50,000 in m RR just one year later so raising a new round of funding was honestly one of the easiest parts of running this business now that doesn't mean that the whole company building process gets easier but having to be so careful about your spend is most certainly very distracting anyway if you feel that your company is ready to raise capital we can probably help so grab one of our pitch stick templates or get our team to help you write or design your slides you can find the different ways in which we can get involved at slide be calm slash pitch deck if you have any questions about this story or the fundraising process I'll be holding a live Q&A as this video goes live so join us our discord on slide be calm slash live if you're not ready to raise money then you can just subscribe see you next week [Music]

Channel: Slidebean

Views: 89,586

Keywords: How NOT to spend your first $250000 round of funding, startup funding, startup company, seed capital, how to start a business, venture capital, startup finances, startup business, startup funding explained, finances 2020, angel investors, slidebean CEO, Caya Slidebean, slidebean, slidebean financials, buffer, baremetrics, early-stage accelerator, startup accelerators, startup burn rate, stock market, LTV, b2b, 500 startups

Id: J-9H_rXMlos

Length: 17min 14sec (1034 seconds)

Published: Fri Jul 03 2020