Aidi — Practical Measures To Avoid Misusing Raised Capital

Imagine a startup without enough capital to sustain the business and create expansion opportunities. No startup founder wants to imagine that because what’s the point of building a company that will only last a few years or months before crumbling due to lack of funds for sustainability? Pointless, right?

This is why every startup founder, at certain stages of their company growth, looks to raise capital to ensure the company has enough resources for sustainability. However, while it may be tempting and convenient to raise funds early to experiment, it is often wise for early-stage startups to bootstrap and use their own money to build a sustainable business model before seeking external funding. This bootstrapping approach creates financial discipline and allows founders to be more creative, teaching them to be frugal and efficient with limited resources.

Misusing or Mismanaging raised capital can jeopardize your startup’s success and make potential investors shy away from your startup in the future; not forgetting that you can also face a lawsuit😬. Every startup founder should maintain financial discipline at every stage of the company’s growth and below are some practical measures founders can adopt to manage funds responsibly:

1. Create a Detailed Budget: Create a detailed and comprehensive budget that outlines all anticipated expenses such as marketing and sales costs, operational expenses, product development expenses, etc. Doing this will help you know how to allocate funds appropriately and strategically to align with your company’s goals.
2. Maintain Financial Transparency: Not maintaining financial transparency is a common trap many founders fall into. After receiving funds from investors, it is important to highlight and document how every penny is spent. If possible, you can also create a separate account for the acquired funds to track how the money is spent. Additionally, you can hire a finance manager to maintain your cash flow and regular audits.
3. Avoid Salary Greed: It can be tempting to raise your salary significantly after securing capital. While we do not oppose salary increments after securing funds, we are saying DON’T GET GREEDY. This temptation often lands founders in trouble as they spend most of the secured capital on themselves, rather than channeling it to growing the business. While it is reasonable to increase the salaries in your company, make sure it is done moderately and in ways that do not compromise your business’ growth.
4. Communicate Transparency with Investors: Investors appreciate regular updates on how their money is being used and the progress your company is making. By maintaining open and transparent communication with investors, you build trust and help align the investor’s expectations with your company’s goals. Also, regular accountability to the investors reduces the temptation of mismanaging the funds.
5. Focus on Building ROI-Driven Products: Allocate money and resources to products that offer a clear return on investment (ROI). This way, you can be sure of steady revenue that contributes to your business growth and investor satisfaction. Adopt a lean approach to your business operations, avoid unnecessary expenses, and focus on profit-making for your company. 

Proper management of raised capital enhances the financial stability of your company and also makes investors more confident in your success and growth. By implementing these practical measures, startup founders can avoid misusing and mismanaging raised capital, maintain financial discipline, and focus on the company’s growth rather than self-satisfaction.