How are you going to spend your money? It's one of the last slides in your pitch deck where you outline to investors where their money will be going. This is the chance to really impress investors and show them that their money is going to really accelerate your business. Unfortunately, most founders I talk to make the mistake of thinking their money will go to things like marketing or hiring a sales team. Let's take a look at why this is a mistake and some of the better ways early stage companies can use the money they are trying to fundraise.
Putting the Cart Before the Horse: Why you Can't Just Buy a Sales Team
At first it might seem logical to use money you fundraise to hire sales people. Why? Because most people absolutely dread making sales calls. There is a certain personality needed to be great at cold calling potential customers and most founders, quite frankly, don't have. Especially in tech or SaaS, there are a lot of introverted product developers and generally those people don't like to pick up the phone and make calls. So why not hire people to do it for you? If you have a product the next thing to do is sell it right? Well, not so fast.
The main issue is early stage founders are too focused on EXECUTION risk and not enough on PRODUCT MARKET risk. Early stage VCs are taking two types of risk. The first risk is product market risk, which answers the question: Is this the right product in the right market? This is where you have to prove that customers actually want your product and are willing to pay for it. The second risk is execution risk, which answers the question: Is this the right team to scale this business? This is where you have a proven product that people want to buy, but you haven't proven that you can scale it to lots and lots of customers.
Founders unfortunately tend to only focus on the execution risk. They believe in their own product so much that they completely discount the fact that customers might not want it that bad. From their perspective, they have something great and the only thing they need is people to them sell it. It's not bad to have belief in your product, but understand that when you have ZERO sales, investors are much more concerned with the product market risk than execution risk. From an investors perspective, unless you have proven through sales and growth that you have a great product in the right market at the right price point, investors will not be excited about you wanting to hire a sales team with their money.
How to Get the Most Bang for Your Buck: Better Uses of Funds
So hopefully by now you realize that hiring sales people probably isn't the best use of funds for early stage companies. This then begs the question, what are the best uses of early stage funds then? The simple answer is anything that focuses on addressing product market risk. For example, you could spend money to better understand your customer to ensure that you are accurately addressing their pain points and tweak your product accordingly. You could get more accurate data on customers willingness to pay or research your competitors to understand where you fit in the market and how you differentiate yourself. Basically anything you can do to validate that you have the right product, in the right market, at the right price is a better way to use your money than just hiring sales people.
To drive this point home, let's look at two scenarios. In scenario 1, you have a decent product that is marketed great. In scenario 2, you have a great product that is marketed decent. If you had to put your own money behind one of those companies where would it go? The answer is obvious. Early stage money (seed and series A) needs to be focused on addressing product market risk. Once you have cleared that hurdle, then you can focus on execution risk and hire sales people with your Series B fundraise.
Summary
Early stage companies need to focus on product and market before they focus on sales people. Until you have established that product market fit, you (as the founder) are the sales team, and the marketing team, etc. As a founder you need to wear multiple hats in your business and not just the ones you like. No many people enjoy making cold calls, but it's something you need to do to show that your business is worth investing in. Sales will come, but only after you put in the ground work on the product, the market, and the price. If you are having any trouble raising money, reach out to us at InfleXion Point. We are happy to help!
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