How Should a Startup Spend Their First Round of Funding?

By Fernando Berrocal

Following the pandemic, there are more startups than ever before. More entrepreneurs are utilizing their finances to develop new digital businesses in a variety of areas as the e-commerce industry continues to grow and working remotely is continuing to stay a trend in the business world. Starting a business, however, comes with a price tag that includes everything from hiring to production.

This is where the role of Venture Capital (VC) enters the picture. VC, which is defined as a sort of private equity investor which invests in businesses with high growth potential, may play a significant role in an organization's development and can help with a variety of startup-related expenditures.

Startup and VC Spending

In fact, Venture Capital-based funding has increased dramatically over the previous decade, with investments totaling $753 billions of dollars since 2009.

What exactly is VC, and how do you obtain it?

Venture Capitalists are investors that would like to put money into new startups in exchange for equity, or a piece of the business. Venture Capitalist capital may help a business get off the ground and give access to the stock market for small businesses wishing to expand or new digital-based startups in the market. VC-based funds are frequently made up of seasoned business executives and high-stake investors who can provide knowledge and strategic counsel to young entrepreneurs who are new to the game in addition to providing funding to smaller enterprises.

A startup with considerable growth potentials, such as a business idea with a new approach for its niche market or a unique product/service that is anticipated to do well in today's climate, is most likely to attract VC investors. To secure VC funding, you must have a track record of success and a strategy for success that VC's are prepared to put their time and money into.

What do entrepreneurs spend their first round of VC on?

The usual VC investment is between $1.5 to $3 million dollars, and it is spread out over several years as the business grows. VC's hope to earn a profit on their investment as the business grows during this phase, while also holding a share and some control over the organization's destiny.  You could be wondering which sections of the organization's foundations are the best to invest in. Here are some of the most frequent areas that start-ups will prioritize when they raise cash, ranging from hiring to marketing.

  • New Employees: This may seem like a no-brainer, but building a strong workforce is crucial for businesses to succeed. With enormous amounts of VC money to spend on both manufacturing and sales, business executives must first assemble a team of professionals to oversee future production and sales expansions both domestically and internationally.

Startup and VC Spending in the first round of funding

Using VC to help with staff recruiting and training will result in a more productive team that adds more value to the business. As the business grows, utilizing the expertise and experience of its employees will result in higher levels of productivity and, as a result, bigger revenues.

  • New Product Development: With an average capital commitment of $1.5 million, business owners may set aside part of this money to work with their VC funders on innovative, distinctive product development ideas.  It's all about finding new angles inside a specialized industry to encourage business growth, and finding investors may help with that. Using VC money to help with product development is a sensible investment strategy since it may put startups ahead of their competitors by increasing their planning and production resources.

  • Prioritizing Marketing Efforts: Did you know that 46% of business leaders are increasing their market expenditure post-pandemic, compared to just 12% before COVID? Prioritizing marketing efforts is critical if entrepreneurs want to stay on top of their components as businesses go online. Smart marketers may use VC capital investment to put more money into ad campaigns, social media content, and Search Engine Optimization (SEO) initiatives. Increasing engagement and brand recognition is a great method to boost sales and conversions, allowing entrepreneurs to make more money and have a foothold in their market.

Are there any drawbacks to VC funding?

While VC-based funding may be a valuable tool for businesses attempting to break into the market, business owners are frequently reluctant to give away their control. Since private equity investment sometimes entails handing over a significant portion of your business in exchange for money, many VC's will want to be engaged in the decision-making process and may even veto ideas if they don't think they'll earn profit.

For new entrepreneurs, this might be a difficult decision. While VC funding will help you thrive in a competitive industry, you must evaluate the loss of control and/or ownership of the business before moving forward.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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