About two years ago, when I was starting to raise Haystack IV, I sat down with one of my VC mentors at The Upfront Summit in LA to get his quick feedback on my slides. He ended up focusing only on 2-3 slides and then we got into a discussion about his own fundraising history. As we were walking back into the sessions, he asked me how I was balancing the act of fundraising for a fund with investing the capital from a previous fund. The short answer is, it’s hard to do. There is significant competition for your attention in that scenario. And, making an investment decision requires a lot of RAM, so a decision like that chews up a lot of resources. To which the VC responded, “Yeah, but you still need to put the money to work.”
That line has stuck with me. The world doesn’t care if I, as a fund manager, am trying to make new investments, help existing investments, AND also raising a fund like I did a while back — I still need to “put the money to work.” I was reminded of this line because I actually used it in a slightly different context with a founder I’m working with and invested in.
I’ve seen this pattern pop up a few times. A company is starting to get its sea legs, they’re booking revenues and growing, and they raise a hefty seed round of, say, $3M-ish dollars. In today’s funding environment, these kinds of rounds are quite common. Those founders can often choose from a few term sheets.
Once they decide and the money hits the bank, a new problem arises — how does the company “put the money to work?” Sometimes, we’ll see a company that spends or burns the money too fast. No one wants that, for obvious reasons. At the other end of the spectrum, I do see companies being too timid with their spend, so in these scenarios, I try to coach the CEO to think about using the funds “as an investment” vehicle. In other words, if the founder has raised $3M-ish and is booking revenues and trying to set up the company for a big box VC round (which, let’s be frank, 99% of founders here want to pursue), those larger VC firms actually want to *see how* the CEO “invested” the initial $3M they raised. Like other pieces of evidence, how the CEO leverages the resources they have is part of the decision a larger VC calculates, thinking to themselves “Well, if I give them $10M, how do I know how they’ll leverage it?”
There are some bread and butter things the CEO above can do to leverage their position. They can invest in activities that boost customer acquisition and/or engagement. But, most critical in my opinion in today’s fragmented talent market, is to see if a CEO can take the money (which is relatively easy to raise) and turn that into a recruiting advantage. Can the CEO recruit even just 1-2 incredible people and form a stronger team? Can they invest in products that help them acquire more customers and/or get those customers more deeply tied to the service? The sweet spot is a bit of a Goldilocks — VCs do get skittish when they see a wild burn rate, but they also lose interest when they don’t see how the CEO has invested the capital he or she has raised. So, like investors, CEOs who go down this path also have to “put the money to work.”