The funding round gets a lot of press. News lines about which companies are raising and who’s backing them fill the Sifted inboxes every day. LinkedIn is full of founders shouting about the capital flowing into their startups.
But less is made of where that money then goes. How do you divide it up to make sure you have enough to cover your costs and grow until the next time you go out to the market to raise? What happens if a crisis hits and it looks like your coffers could run dry?
That was the topic of one of the panels on the Startup Life stage at Sifted Summit a couple of weeks ago, moderated by tech commentator and former Startup Life author Anisah Osman Britton, featuring Hannah Samano, founder and CEO of health and wellness platform Unfabled, Gerardo Gagliardo, chief financial officer of cybersecurity company Exein and Kirsty Macdonald, a principal at consumer-focused VC JamJar Investments, set up by the founders of drinks company Innocent.
Is it as easy as listening to what your investors tell you?
“We don’t come in and tell the founder what to do,” Kirsty said. “We get the plan before we invest, interrogate it and ask if this is something we want to get behind.”
It depends on your model, she added, using the example of Innocent Drinks, which took an early cheque of around £250k, scaled for a decade and then brought on the Coca-Cola Company as a shareholder, which eventually bought the company in 2013. In that vein, JamJar leans towards “capital efficient companies”, Kirsty said.
“You need to invest wisely, where value is created,” Gerardo said. “That’s the role of a startup [...] as Kirsty said you need to arrive as soon as possible to reach the milestones that give you the possibility to raise again at a higher valuation.”
Here are the panellists' tips for making that happen.
Model the worst case scenario
The consensus on the panel was that a fundraise should give you enough runway for 24 months. “That’s the golden rule”, Gerardo said.
That said, once you have your money and you begin to deploy it, audit your spend often and recalculate if you need to. “I think you should revise it at least every quarter, because things change,” Gerardo said. He asks his team to produce a monthly review; he produces a quarterly review with his CEO and with investors every board meeting.
You also need to model for different scenarios. Crisis can hit, as founders found out earlier this year during the tariffs debacle in the US.
“We need to try to predict that and a good way to do that is to create some sort of scenario analysis with the best case, worst case and impossible case scenario,” Gerardo said.
Hannah added that you also need to plan accordingly if you end up raising below your target.
“That’s where it’s about adapting and adjusting your models,” she said. “We always have a bear and a bull scenario in terms of spend and growth so that depending on where we land with the fundraise and what growth milestones we unlock along the way we know how to ramp up or pare back.
“We take a baseline of our cash flow and P&L, and we always model out our core operational costs and core conservative growth costs […] if we don’t have explosive growth, what does that look like over an 18 to 24 month period?”
Put aside an experimental budget
You also need to put money aside to test things out. But don’t go bonkers.
“We separate out the bets we’re making which we’re not expecting to turn a profit straight away,” Hannah said. Though “it’s making sure not all of our capital is going into crazy bets, that we are supporting the baseline of what’s working while unlocking the hopeful moonshots.
“We ran nine to ten experiments over the last 24 months and one of them paid off in a game changing way,” she added. “Two to three of them did okay and the rest failed.
“It’s about that experimental mindset, ringfencing [experiments] and knowing what good looks like and when to kill projects. As long as you get one that is a really good win then you’re off to the races.”
That experimental budget can also go towards internal AI tests which can end up trimming operational costs. Kirsty said the biggest cost saving impact she’s seen from AI across her portfolio is in customer service and content creation. “A lot of our businesses have a line item for trying and playing around with things and seeing what sticks,” she said.
Unfabled has managed to keep its team lean while growing the business 12x in the last 24 months, Hannah said. “With efficient headcount increases we’ve been able to level up in a way I couldn’t have imagined two years ago.
It’s automated parts of customer service, content, backend operations, fulfilment, stock ordering and forecasting, she said, things that in the past took two junior operations people. “We now don’t have those roles in the team,” she said. “I think how much you can do with less is incredible.”
Don’t go gung-ho on hiring
“A mistake you should avoid is to over hire,” Geraldo told the audience. “One important thing at the beginning is to find the right people, the right team, try to give them stock options to keep them engaged,” he said. You need to find generalists early on, increase their salary year on year in line with performance and not stuff your team for the sake of it.
When you over-hire so you can boast about metrics to VCs, “that is a problem”, Geraldo said.
Kirsty added: “I’ve been on boards where there have been some issues in a company and the solution has always been, ‘let’s hire someone to fix it’.
“I think that can become quite dangerous, because often it’s that they don’t have the right people in the first place.” Instead she said you should look internally, and think about the people you have, your strategy and culture before adding headcount.
You also need to be smart about spending on your C-suite. One audience member asked what the panel thinks about the role of the fractional CFO — someone who’s brought onboard at a startup typically for a few days per week.
“I haven’t seen it work in the portfolio yet,” Kirsty said. What she has seen work are early-stage companies hiring smart, ambitious individuals who’ve maybe done one or two years at an accountancy firm, are well trained and you can sell them on the company’s vision.
“They have the opportunity to develop into something as you grow,” Kirsty said. “I’ve seen that work much better than paying quite a lot of money for someone a couple of days per week [...] having someone full time at the early stage is important.”
A good CFO holds the key to your runway
“The companies I’ve seen where it’s crashed and burned is where the finance director isn’t a counter balance to the CEO,” Kirsty said. “The worst example I’ve seen is a CFO who just did what the CEO told them, the company was cash constrained and it all ended up a mess.”
The flip of that, she said, is a company that brought on a “brilliant” finance director who became the company’s CFO and was “a huge reason” the company succeeded. “A good CFO who is cofounder-like can make or break a company,” Kirsty said.
The message to founders there, then, is that they have to find someone to act like a counterweight, and when they do, they have to listen. ““I don’t subscribe to that superhero, all seeing, all knowing founder, it’s just not how people are,” Kirsty said. “The best founders I’ve worked with are in the detail but are very conscious of where their gaps are [...] they delegate.”
That said, in the earliest days you also need to back yourself, and the vision you have for your company. “I believe that through to Series A you’ve got to trust your intuition and your judgement,” Hannah said. “No-one knows the business like you do, or can understand that gut feel around where growth is going to come from better than you.”
