Regardless of the round of funding, a significant cash flow can have the same impact on founders.

Yes, you can now invest in the different projects you wanted but couldn't until now. And it can be very exciting at first. But it would be best if you were mindful of how you'll use this new capital as a source of growth.

I've seen startups from different sectors make similar marketing mistakes after raising investments. So, I'm breaking down the biggest ones to provide you with some insights, hopefully, so you don’t have to go through them.

Hiring too fast:

One of the first things you might consider doing when more money comes in is to build an A-class team, finally meeting your level of ambition for the future of your company.

However, for example, in large series A rounds conducted by first-time founders, there's a high risk of overstaffing your team.

Every department leader naturally wants to grow their team – the more talent you can bring in, the more you can accomplish and succeed. Yet, companies can forget that people's costs are the most significant source of cash burn. As such, it's common to see startups recruit three designers and five developers and build a full marketing team. With such a team very early on, you might not necessarily see the results, which will only be a source of frustration for everyone.

Naturally, a likely need following such a fast-recruiting period is to invest internally to accommodate these new hires. As a result, this will lead to over-investing. One of the biggest opportunities and challenges for any company is the ability to recruit and retain staff. Unfortunately, some companies tend to do that at all costs, from getting office space that costs +£1m a year to large bonus structures. You need to be mindful that taking care of your staff can be your greatest source of success, just like it can kickstart your fall.

Growth at all costs:

Startups raise money based on current growth but also based on a predicted trajectory. However, it's obviously much easier to grow 2X or 3X in your first years than after two or three years. Having said that, this is a type of promise you are giving to your investors. Due to it, there's a tendency to overly invest in growth by focusing exclusively on volume instead of sustainability. I mean a tendency to have an ROI below 1 to justify the race to growth.

A worldwide famous example would be Deliveroo. Even though they're incredibly successful on many accounts, they cannot catch the amount of money that's been burnt because they are not making profits on every transaction. To illustrate how Deliveroo is doing today, in the first half of 2022, they recorded a loss of £68m. In the first half of 2021, this loss was equal to £25.8m.

Failing to scale:

As I mentioned, investors decide to put money into your business based on your current and future growth prospects. In that sense, scaling fast and efficiently is very important.

You first want to expand and grow in your local market. But in most industries, especially B2B, you will always find a ceiling to your growth potential. Therefore, it can be crucial to grow in other markets to meet your goals.

It's slightly easier for UK-based companies because they are, by definition, working in England, and London-based companies tend to have an international team already. Therefore, it becomes simpler to attract companies from other markets, facilitating entry to bigger markets like Australia and the US than it is for European-based companies.

On the other side, it becomes slightly more strenuous for European-based companies. They generally have a local team, and most processes, website and documentation are done in their native language. Hence, scaling abroad presents its sets of challenges and failing to do so can lead to flat growth ... the biggest rival of all startups.
 

Failing to raise more:

If your business is not profitable after raising your series A round (which is very common), you will need to raise more again. However, to raise another round, you must demonstrate an ability to grow and scale.

That's a delicate chicken and egg situation when you put this in the context of ‘growth at all costs’ discussed earlier. If you are not able to grow at the desired pace that you've laid out with your investors, they are likely not to follow you again in the upcoming round. Unfortunately, that's a sign other external investors will perceive as a lack of trust in the business, which puts you at considerable risk.

A positive note to conclude:

In this article, we've been discussing mistakes and errors to avoid. There are endless great success stories out there, and these companies can be good inspirations. I do believe, however, that it is by understanding what you shouldn't do and what leads to the fall of a startup that you can make better decisions for the sake of your business. So, take the time to carefully understand what it is you want to achieve, and break down how you will meet those goals, sustainably.