Monday Feb 25, 2013 by Izzy Azeri - Co-Founder, Stackdriver
There has been a lot of buzz lately about startups being "Orphaned" after a Seed round--a phenomenon that has been dubbed the “Series A Crunch”.
● In an October 2011 article entitled, “Web Start-ups Hit Cash
Crunch”, the Wall Street Journal reported that “While scores of Web companies were
founded in recent years, there isn't enough venture capital to keep all of them
● Shortly thereafter, Techcrunch highlighted an impassioned debate on Twitter on the cause, reality, and implications of the crunch.
● Last December, CB Insights released a report highlighting the fact that over 1,000 start-ups that raised a seed found will be unable to raise an additional round of funding. This reignited the conversation and spawned numerous follow-on posts in TechCrunch, VentureBeat, GeekWire, and elsewhere.
● Earlier this month, Smarana Mitra posted an article in Xconomy encouraging entrepreneurs to avoid getting discouraged and avoid chasing VC investors, and last week, Forbes explored whether crowdfunding would alleviate the issue (it won’t).
Naturally, as the co-founder of a startup, alarm bells go off in my head and my instinct is to swim against the tide and do everything in my power to avoid being orphaned. That being said, we are fortunate enough to be in a situation where we raised a relatively large ($5M) first round of funding and don’t necessarily have to address these challenges right now. I wish I could call it foresight, but honestly it’s more luck. However, we realized when we raised money that we did raise more than the norm for our stage, and so we structured our expense budget so that we would run our company off $1M of ‘Seed’ funding before we dipped into the rest of the ‘Series A’ funds. As we hit the 7 month mark at Stackdriver, we are just now moving into our ‘Series A’ stage and making key investment decisions and facing new challenges. I thought I’d share some of these so you may consider them in your own business.
Some of our new investments and decisions are tactical, but others are vital to increase our probability of success. Some of the more common place things to consider are:
- Planning for space expansion – when we identified our office space initially, we landed small space initially and structured our lease so that there was immediate expansion space 6 months down the line. We expected our team to grow and didn’t want to move. We were able to negotiate all leasehold improvements and build-out into the per sq/ft fee of the lease and we were also able to customize the space a bit. I would highly recommend this approach as a way to conserve cash up front, yet provide the expansion needed for growth in the Series A stage. This extra space is costing us an extra $1,600/month.
- Lunch seating – as mundane as it sounds, planning for a bigger lunch area for people to sit at once you grow beyond single digit team members is important – especially for team collaboration and culture development. This is something we didn’t consider early on and are doing our best now to add seating in an informal yet comfy fashion. Cocktail tables and stools work great and only cost us only $500!
Other more serious things to consider as we’ve moved from Seed to Series A have included:
- Sales Systems and Processes – We quickly setup Salesforce.com with a short training on tips and best practices for our team (yes including engineering!). We also standardized on Join.Me for easy and seamless demo’s for customers and rolled out a simple phone system for outbound calling through Comcast. As we scale our team, we’ll likely implement a Shoretel phone system and inside sales analytics software, but for now, these 3 tools are efficient and get the job done. All in, we’re spending about $160/month on these resources.
- Customer Communication – this is an area we’re still perfecting, but it’s really important to make sure we are deliberate and frequent when we talk to our early customers. Luckily my co-founder has a product management background, so he’s coaching us on getting customer feedback, driving it back into our development process, and frequently following up and taking the features back to customers. We’re averaging about 2 calls every 3 weeks with our active, early customers, along with more frequent email communication. We’ve also implemented Kissmetrics for user login behavior tracking as well as UserVoice for in app product feedback. The combination of these tools and processes seems to enable us to test, measure, and refine our product and is costing us about $100/month.
- Product performance and visuals – as we’ve deployed our product to customers, we’ve made it a point across our development team to make sure we’re paying attention to the glitz of the product. We’ve updated designs, colors, and navigation while also focusing heavily on performance. One of our first customers was 10x the size of any customer we had ever spoken to and this taught us early to focus on performance and build for scale. We probably underestimated when we’d have to focus on these things, but it’s a great feeling to now be proud of what we’re showing customers.
There's no doubt that we've learned a lot since our infant days of Seed funding, and I’m sure we’ll have more growing pains in the future as we move to general availability of our product and look forward to a Series B. Hopefully by the time we get there, there won’t be a "Series B Crunch". But even if there is, we’ve learned to focus on those things which are important to our customers and our team to help make us successful. This is a sport of testing, learning and applying - a cycle - and it's awesome.