What are the best things to spend money on in a seed-stage startup?

The primary spending focus for seed-stage software companies should be hiring one or two highly skilled engineers. Founders should continue to handle sales and marketing themselves until product-market fit is achieved.

When should a startup hire a sales or marketing team?

Founders should delay hiring sales and marketing roles until after achieving product-market fit. Before this point, founders possess the best understanding of their product and market, and hiring prematurely can lead to wasted resources.

How does spending strategy change after achieving product-market fit (Series A)?

Once product-market fit is established, startups can begin strategic spending on sales and customer support to scale. The key is to hire when individuals are genuinely overwhelmed by inbound demand and to spend on initiatives with measurable impact.

What are the risks of overspending in a startup?

Overspending, especially before product-market fit, significantly reduces a startup's runway, limiting its time to find product-market fit. It can also lead to inertia, distractions, and hiring the wrong people, ultimately increasing the risk of failure.

What are common wasteful spending habits for startups?

Common mistakes include hiring branding agencies prematurely, spending on rebranding, unnecessary office space, or advertising before understanding customer acquisition. Founders often mimic larger companies rather than focusing on core needs like product-market fit.

Why is transparency in spending important for startups?

Transparency with investors about spending, runway, burn rate, and revenue is crucial for accountability and early intervention if things go wrong. It allows for pattern matching and helps prevent preventable failures.

What is the role of revenue quality and retention post-Series B?

After Series B, the focus shifts to the quality of revenue and retention. Companies that don't understand their net revenue retention are at high risk, as predictable, high-quality revenue engines are essential for sustained growth.

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The Right (And Wrong) Way To Spend Money At Your Startup

Y Combinator

Science & Technology4 min read30 min video

Feb 12, 2025|73,007 views|1,608|45

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Key Moments

TL;DR

Startups should spend money strategically, focusing on product-market fit before growth and avoiding vanity hires or unnecessary expenses.

Key Insights

Pre-product-market fit, money buys time, not growth; focus solely on achieving product-market fit.

Early hires should be engineers, with founders handling sales and marketing until product-market fit is established.

Marketing and sales hires are typically the last to be made, and founders should be the primary sellers.

Maintain a long runway and invest in understanding revenue quality and customer retention, especially post-Series A.

Avoid vanity spending like branding agencies or large offices; focus on essential needs and measurable impact.

Transparency with investors through regular updates on runway, burn, and revenue is crucial for preventing preventable deaths.

PRE-PRODUCT-MARKET FIT: PRIORITIZING TIME AND ENGINEERS

In the earliest stages (pre-product-market fit), the primary goal is to find product-market fit, and money's main utility is to buy time for this exploration. Founders are advised to spend minimally, focusing only on essential needs like laptops. Early hires should ideally be one or two engineers, as money cannot directly buy product-market fit. Founders should personally handle sales and marketing, as they understand the product and customer best, and hiring for these roles prematurely can be detrimental.

SEED STAGE INVESTMENTS: FOCUS ON ENGINEERING AND FOUNDER-LED SALES

Upon raising a seed round (e.g., $0.5M-$2M), the focus remains on product development. The most common and effective use of funds is hiring one to two engineers, preferably individuals the founders have prior experience with. Founders themselves should continue to lead sales and marketing efforts. It's a critical mistake to hire for sales or marketing roles before achieving product-market fit, as no external hire can initially sell the product as effectively as the founders.

THE DANGER OF EARLY GROWTH SPENDING WITHOUT PRODUCT-MARKET FIT

Having raised capital before securing product-market fit can be dangerous, as it can lead founders to incorrectly prioritize growth over validation. Spending money on scaling or hiring extensively before understanding customer demand slows down the ability to find product-market fit, which is the sole objective at this stage. The money raised should extend the runway, allowing more attempts to find product-market fit and more opportunities to fundraise effectively.

POST-SERIES A: SCALING SALES, CUSTOMER SUPPORT, AND RETENTION FOCUS

Once product-market fit is somewhat established and a Series A round is raised (e.g., $8M-$10M), spending strategies shift. Hiring sales teams becomes more justifiable, provided their impact can be measured and they are expected to generate more revenue than their cost. Customer support also becomes important for acquiring and retaining customers, acting as a crucial feedback loop to founders. Special attention must be paid to customer retention and reducing churn to ensure sustainable growth.

SERIES B AND BEYOND: FUELING A PREDICTABLE REVENUE ENGINE

By Series B, companies should have a clear understanding of their revenue quality and a predictable revenue engine. Money primarily serves as fuel for this engine, driving growth based on proven metrics. The focus shifts to high-quality revenue and strong net dollar retention, indicating the ability to grow revenue from existing customers. Companies that fail at this stage often lack a true understanding of their retention metrics or revenue quality, despite investor confidence.

AVOIDING WASTEFUL SPENDING AND MAINTAINING TRANSPARENCY

Founders are cautioned against vanity spending, such as hiring branding agencies or acquiring expensive offices, which do not directly contribute to product-market fit. Similarly, early ad spending can be a trap, outsourcing customer understanding and creating an unhealthy dependency. Maintaining transparency with investors through regular updates on runway, burn rate, and revenue is critical to catching problems early and allowing investors to provide necessary guidance.

THE PERILS OF OVER-HIRING AND EXTERNAL VALIDATION

A common mistake is over-hiring, especially for non-engineering roles, before product-market fit is solidified. Founders sometimes mimic larger companies or follow investor suggestions to 'go hard,' which reduces runway and can lead to hiring the wrong people. Revenue per employee is a key metric to monitor, and it should ideally increase over time. Relying on external validation like perceived team size or investor numbers, rather than core metrics, is a significant pitfall.

UNDERSTANDING THE VALUE AND MISSTEPS IN SPENDING

Spending too much too early can be a result of founders trying to force product-market fit or seeking external validation akin to larger companies. The core message is that until product-market fit is achieved, money's primary value is in extending runway. Post-product-market fit, spending should be on initiatives with measurable impact, like sales teams or customer support, always monitoring key metrics like retention and revenue quality to ensure sustainable growth.

Mentioned in This Episode

●Software & Apps

●Companies

●Organizations

Startup Spending: Dos and Don'ts by Stage

Practical takeaways from this episode

Do This

Pre-seed/Day Zero: Spend only on absolute necessities (laptop, living).

Seed Stage: Hire 1-2 engineers if necessary; founders should handle sales and marketing.

Series A: Hire sales and customer support when overwhelmed by inbound, and when revenue is clear and demand is proven.

Series B+: Focus on high-quality revenue, predictable engines, and reinvesting in growth where impact is measurable.

Always: Maintain transparency with investors, monitor revenue per employee, and prioritize retention.

Measure the impact of all significant spending.

Avoid This

Pre-seed/Day Zero: Avoid spending money just because you have it.

Seed Stage: Do not hire for sales or marketing until product-market fit is achieved.

Seed Stage: Do not assume hiring a salesperson will solve your product's sales issues.

Series A: Avoid extravagant spending like billboards or unmeasurable programs.

Do not chase vanity metrics like perceived size or fancy offices before product-market fit.

Do not spend money on branding agencies or rebranding early on.

Avoid early-stage advertising that outsources customer understanding and learning.

Do not make a financial model that is overly linear or optimistic about hiring and revenue ramp.

Do not increase burn rate when pre-product-market fit, as it reduces critical time.

Do not assume your runway is fixed; calculate it based on actual need and progress.

Common Questions

In the earliest stages (pre-product-market fit), spending should be minimal, focusing only on absolute necessities. Spending should increase only when clear signals of product-market fit emerge, allowing you to invest strategically in areas that will drive growth and scale.