Thoughts on Managing Cash Burn & Runway

Venture capital is a great thing. It enables us to grow companies far faster than we could organically. It enables us to think big. To move fast, be aggressive, and chase huge outcomes.

I’m sure you have noticed that funding rounds keep getting bigger. Today’s series A looks like yesterday’s series B.

But….

Be Wary of Cash Burn Rate in Startups

There is a danger to spending too fast on too many things. For one, cash is to your business as blood is to your body. When you’re burning, you’re dying.

The failure rate for startups is high. While there are many underlying causes of startup failure, the actual cause is excessive cash burn, and ultimately, running out of cash. You can keep figuring it out as long as you’ve got the money.

If you have successfully raised a funding round, then you are already on a good path. Otherwise, you would not have gotten the money. So, while you can and should be more aggressive, you don’t have to suddenly change your stripes and spend in every direction at once.

Mike McDerment, co-founder and FreshBooks once told me about conversations he had with his original angel investor. His investor would ask him how big he thought the company could get. Mike honestly answered, “I don’t know. I’m just putting one foot in front of the other”.

Mike did not need or want to commit to a “go big or go home”, high cash burn strategy. In fact, the company was ten years old with over 130 staff before raising its first venture round.

It was a similar story with Shopify. It was angel-funded and had been profitable before deliberately deciding to burn cash because they “knew” they were ready.

Both companies were many years into their journey before going into high cash burn rate.

The point here is twofold: i.) Good things generally take time, so settle in for the long haul and enable yourself to actually survive and thrive for that journey by managing cash burn; and ii.) Hit burn hard when you KNOW you have nailed product-market fit and found repeatable and scalable channels for growth.

Startup Milestones: Questions to Consider

Identifying your startup milestones is key: Are you clear about what the next big value-creating milestone is for your business? The milestone that will either enable you to raise the next round, get to profitability or exit.

How confident are you that you will hit that milestone in runway? What can go wrong? How much wiggle room do you have?

Examine your current spend: What spend is truly contributing to achieving that next big startup milestone? What spend isn’t? Is there fat in your current spend that can be trimmed without impacting your trajectory towards the next big milestone?

Photo by Will Drzycimski on Unsplash