We often hear stories about startups that spent too much, too fast and many times, spent foolishly on things like parties and Herman Miller chairs for all. What we don’t hear enough about are the startups that were too frugal and rather than investing in key initiatives, they held onto cash for dear life.
The good news is that these frugal startups stayed alive longer. The bad news is that no one cared — they didn’t move their business far enough with their seed capital and therefore, were unable to raise the follow-on financing they needed. How to use startup capital correctly is not just a life-or-death question, but also a survive-or-thrive question.
Startups correctly focus on keeping burn down because you want your cash to last as long as possible. The more time you have to reach key milestones, the better your chances are of reaching them. This is why VCs usually want their companies to have 18–24 months of runway. We know all too well that most things take longer to prove out than any of us can imagine they will. This is called planning fallacy.
The key is to balance aggressively investing in the areas that are on your critical path while being frugal with all else. You must spend on the areas that are critical to your stage and your model. If you don’t, your company does not have a chance of thriving.
- If you want to prove that the people who use your product, use is regularly and can’t live without it, then you need to show strong product engagement metrics. Hiring a kick-ass product manager who knows how to build sticky user experiences should happen immediately.
- If you have product market fit and now want to prove that you can scale sales efficiently, hire an experienced salesperson or sales leader. You may need to accept that if they hit the aggressive growth targets, they will make more cash compensation than you. Don’t sweat it–that investment will have a high return on investment for you and the value of your equity.
- If you need to prove you can acquire customers efficiently, paying up for a growth marketer who knows how to test various channels and messaging is well worth it. In fact, having a significant marketing budget in the hands of an inexperienced marketer is one of the more expensive mistakes you can make.
I have seen companies with significant burn hold back on spending in areas that are critical to their success. When you are burning $300,000 per month, not spending on the incremental experiments and not pushing hard for break-throughs is short-sighted. Having a real burn rate means that you can’t afford to stall; figure out what works now. Think about the funds you’ve raised as ammunition instead of purely oxygen. And, no dilly-dallying, since time is often not your friend.