Gregory Shepard breaks down how startups should allocate spending across four areas: shared services, support, sales and marketing, and product engineering. He emphasizes splitting product spending into maintenance versus innovation so investors can assess whether the company is scaling or just maintaining what exists.
Chapters
Use of funds. So, you know, most of the time when you do a deal, you have to tell the investor, okay, what's the use of funds? In other words, where's the money going to go? And so a lot of these entrepreneurs I see, they'll have a pie slice graph and it'll say, okay, this much is going to this area and this much is going to that area and so on and so forth. Now, a lot of times the investors won't follow up, but that doesn't mean that you shouldn't. You should be keeping track of use of funds. You just do that by having functional areas. There's usually, in a tech business, there's gonna be 4 primary functional areas. Shared services, that's like operations, IT, all that sort of stuff. You know, accounting, legal, HR, so on and so forth. You have service and support, this is the service delivery folks. You have sales and marketing, and then you have product and engineering. Now, When you delegate money and you say, okay, I'm going to attribute this much money to this functional area, you want to make sure that you show the investors that you're true to your word even if they don't ask about it. And it's also really important that you understand what tell that is for everybody looking at your financials. If you say that you're in a growth cycle but then we look at your financials, I take a look at people's financials and I look at it and I'm like, well, wait a minute, 40% of their money is going to product and engineering. How can you tell me that you're in growth because it looks to me like you're still building your product. The use of funds should be changing as you go through the life cycle, which proves financially, empirically, that you are actually graduating through those different levels. You shouldn't need the same resources to build the product, to manage the product, as you do to build the product, as an example. Another thing with product and engineering is to make sure you break down, if it's a tech company, to make sure that you break down how much is managed, like maintenance, and how much is innovation, meaning new development. Because if you see something that has a huge amount of money going in maintenance and not a lot of money going into product development or innovation, then it means that the code, most of the time, is wrong. It takes a lot of money to manage it. It's not going to scale very well, especially if it's SaaS play. So you want to make sure that it, it rhymes, right? That the story that you're telling is the same story that an investor or an acquirer sees when they look at those financials. I hope this helps.
