More capital is flooding into growth equity at earlier stages, and it’s happening faster than ever before. But even with the rampant enthusiasm for pouring bigger equity checks into startups, founders are now in a unique place in time where they can think differently about how to capitalize their companies.
Just like our personal lives, where most services have become highly personalized thanks to the data our activity generates, startups that operate online create a data exhaust from their operations. In short, data has become an asset for every business, diversifying the kinds of capital that were only available to later-stage startups before.
Data can separate the healthy and experimental parts of all businesses, making it easier to utilize earnings, marketing ROI and inventory to make predictions about or get credit for future revenue streams.
So how should businesses today leverage their own data analytics for fundraising?
Separate the low- and high-risk parts of your business early
Founders should think about their business as four distinct parts.
There’s R&D, which is high risk but yields high reward and is appropriate for equity to fund at the seed stage. You pour capital into product-market fit with the hope that your business will hit an inflection point. You can make assumptions in the early days, but it is not clear exactly what your R&D will yield.
Then you have marketing and acquisitions. You should have a more predictable ROI on capital invested for these, meaning that every dollar spent can be measured and be expected to return a positive ROI (whether it’s a lift in brand awareness, lead generation or conversion activities).
There is inventory, where you are making purchases with the expectation that you are going to sell them at a future date at a certain value. And then there is equipment, where you have an upfront cost to build a product or store or service with a strong sense of the payback on that investment.
Know the value of each segment, so you can understand which portions of your business are higher risk (like R&D, where you aren’t yet sure of the outcome) and which are more predictable (like marketing and acquisitions).
Tailor your funding plan instead of financing everything