Managing Cash Flow After Series A Funding

You’ve just closed your Series A funding, and your company is flush with cash. So what’s the next step?

A Series A round of funding is a milestone that requires outlining your strategy for growth which includes managing cash flow to balance risks and opportunities. Where to spend first and how much? And how should the money itself be handled? 

It’s a heady time. You have money in the bank with only potential ahead. The purpose is to grow the company, scaling quickly. The money is there to invest in the talent, office space, technology and other needs that will support that growth, while also extending the runway as long as possible before raising a Series B.  

The cash flow balancing act involves spending wisely, moving fast to fuel growth, and hopefully replenishing the bank account as the company expands. So where do you start? Success lies in the execution, but experts and experienced entrepreneurs say it comes down to a handful of basics:   

• Get a fractional CFO 
• Establish a regular cadence of budget review and updates 
• Invest in talent 
• Consider ways to grow your cash reserves through investments  

If you don’t already have one, a fractional CFO is a must  

The fact is, most early-stage companies don't need a full-time CFO. But that doesn’t mean the founder or CEO should plan to handle financials independently. Startups can, for example, outsource payroll, accounting and other financial to outsiders to save money on overhead and to benefit from their background working with other startups.  

The starting point for many startups is a fractional CFO, typically an experienced financial professional who works for multiple clients, freelance. They’ll make sure your books are in order, help set up a financial reporting structure, identify key metrics and set up budgeting and accounting. They’ll also advise you on establishing responsible spending habits, using credit cards effectively, fraud prevention and managing accounts payable and accounts receivable.

Fractional CFOs can also help foresee risks that you may not think of as financial, like those related to regulatory compliance, employment rules or insurance. A cautionary tale: one tech startup fired an employee located in a different state. However, it was unaware that it didn’t have the right insurance in place. The employee then sued for wrongful termination, a won a $100,000 settlement. A fractional CFO would have known how to handle this situation.  

Budget. Rinse. Repeat.

The first step in managing your cash flow wisely is to develop a budget. But don’t make the mistake of thinking of budgeting as a one-time exercise. A company’s budget is a living, breathing document. It must support the company’s strategic plan and is constantly changing. 

So it’s worthwhile to perform a budget review every month. On the meeting agenda: Is the company making money on the primary business? Are customers being converted at high enough rates? How much is the company making on a weekly and monthly basis? And where could costs be cut — or added for more revenue capture? The answers should guide changes in spending and saving.  

It’s also worthwhile to build a cash flow model where not a single dollar of revenue comes in — a zero-revenue exercise — to get a clear picture of how much cash is needed to run the business. It’s an effective way to become a little more honest about what the business needs to do. 

The spending mix will vary by company type, size and industry, but talent is inevitably the priority, to build knowledge and expertise and absorb the growing revenue. Expenses beyond that include office space, subscriptions, and advertising and marketing. But it would be best if you kept focus on what’s necessary. A fancy office or other perks aren't really needed to keep the company running. It’s much safer to know what's essential, then spend on that.

Knowing how quickly to spend the money you raised can be a bit of a juggling act. It’s the balance between moving faster and not burning too much money. Spending too quickly before you have a clear product-market fit can make it impossible to know how much time is needed to experiment before finding the right formula. But once customers are excited, spending more quickly on growth makes sense — especially if investors have indicated that they will support additional financing. 

Go big on talent   

Investors and founders agree that the momentum of closing a Series A funding round should be focused on bringing on the best possible talent to operationalize and scale the business.  

Building a team is one of the hardest and most time-consuming aspects of running an early-stage business, and the best founders realize that ultimately their most important job is to build the team around them. 

Many tech startups will hire according to the progression of the business. If the company is still building up its engineering and product bench, it might want to focus on attracting a CTO or a head of product. Sales and marketing leaders tend to follow a little later. A good approach: hire talent as quickly as you can onboard them. Plus, as you make sales projections, take into account that most employees may take roughly three months to get up to speed. 

But as you move fast to scale your team, don’t trade speed for quality. When you have more capital than you have ever had, there is tremendous pressure on you as a founder to start putting it to work. It’s better to be patient until you find the right people. 

How to manage the cash you don’t need immediately?  

A typical Series A round may be designed to last 12 to 18 months, if not longer. So what should startups do with the cash they won’t need right away? After figuring out their burn rate, startups should think about investing what they won’t need for at least 12 months. Having a CFO who understands short-term cash management will be a big advantage. 

Good options to consider are a money market account or a cash sweep program. If the amount of unused cash is sizable, it may make sense to work with a portfolio manager to explore appropriate investment vehicles. But any investments should always prioritize capital preservation and liquidity over return. 

An often-overlooked way for startups to extend their runway is through venture debt, which allows venture-backed companies to raise cash with minimal dilution of their ownership. Startups interested in that option should first ensure the time is right for them for such of a move. 

While a multitude of factors will determine your startup’s growth prospects and fate, good cash management, rigorous budgeting and a talent strategy will help put you on solid footing. They may even turn your company into one of the 65% of startups that make it to their Series B. 

Our team at Silicon Valley Bank has 40+ years of experience in working with companies from seed to Series A and beyond. We’ve helped thousands of technology and life science companies navigate the critical growth phase after a Series A round, and we can help you too. Contact us today to learn more about opportunities for your business and how we can support your goals.