Budgeting and Planning for Startups
A Framework for Founders and Funders
The new year brings a flurry of year-end reviews, new year resolutions and predictions.
Planning is better than predicting…
During the last few weeks of the year, at InReach Ventures we spend most of our time helping and supporting founders with their planning exercise. The most inspiring book to help to think through the relevance of the planning process is Andy Grove’s High Output Management.
Listening to funders we have learned the following rules of the game apply to a good planning process:
1 — There is one-size-fits-all planning process. They key is to adjust the process based on: (a) specific needs / requirements; (b) the stage of the company; © the culture of the organization.
2 — In the early stage of the company building journey the unknown is often overwhelming. This does not mean you can skip planning, but rather create a planning process capable of quickly adapting and adjusting based on new learnings.
3 — There is no such thing as not having time to plan. In reality the lack of a planning process is the result of a low level of management discipline and a management by hope attitude. Often first-time founders, while having a strong product and technology discipline, can suffer in the areas of general management.
Given the above rules of the game this is the type of generic planning framework that we have seen adopted a few times by founders.
1 — Assess the company positioning
Often in the early stage of the company building process founders define the company brand as a logo and forget to ask themselves much more complex questions such as: what do we stand for? What is our positioning vis a vis existing market dynamics? Does our positioning match our internal culture?
Positioning is not a one off activity but an evolving process. This is why we think it’s good practice for founders once a year to challenge their existing positioning and for good funders to help in the process.
A classic reading on this topic is Positioning: The Battle for Your Mind by Al Ries.
2 — Identify key milestones to be achieved before the next key corporate event
Funders have the benefit of being disconnected from the day to day business operations. Therefore, in a healthy relationship founders tend to use funders as strategic sounding boards.
In the early stage of the company building process the next corporate key event is mostly likely a new round of funding. Founders should be very precise in setting a few key milestones (i.e. validation points) that must be achieved to successfully reach the next round of funding.
At InReach we have learned from our entrepreneurs the following:
1 — Milestones should be <= 5. Too many milestones defeat one of key purposes of this planning stage: to crystallise the strategic direction of the company.
2 — Each milestone should be specific and measurable to avoid any sort of ambiguity. Some examples:
Identify product market fit
Achieve $80k MRR with 10% monthly growth and negative churn (mrr expansion generated by existing customers greater then lost mrr by churning customers)
Have a complete management team
Hire VP Eng, Head of Growth, Head of Finance. Embed them in the organization and have a min of 2 quarters of OKRs executed by each of them
Some folks refer to this process as strategic OKRs.
3 — Define a 12 month budget
Good founders and funders know well that in any stage of the company building process the budget is not a spreadsheet exercise but a bottom up planning activity. For early stage startups it makes no sense to try to make the budget overly complex with impossible to validate assumptions and complex formula. Working with founders this is what we have learned as an easy budget process:
1 — It all starts with an organizational design that can scale during the next 12 months and a clear definition of each ‘to be hired’.
2 — A high level product roadmap is a key tool in order to be able to assess the organizational design and the rightsizing of the resource allocation.
3 — Clear definition of a marketing plan with deep level of task definition, again to feed into the organization design / resourcing.
4 — Depending on the characteristics of the business, a sales plan with clear drivers which is mapped back to the organizational chart. This is also what the key revenue assumptions are built on.
A healthy founders / funder relationship is first and foremost a deep discussion about the organization and the level of fit with: (1) the product roadmap; (2) the marketing plan and (3) the sales plan. The modelling of the budget is then an exercise of allocating resources within the business’ current cash constraints.
Product roadmap, marketing plan and sales plan need to be directionally right and must provide the right level of detail to allow proper resource trade-offs.
The budget is a flexible tool and as such evolves and changes during the year based on new learnings. As soon as the learnings make the budget obsolete a new forecast should be generated and organizational design, product roadmap, marketing plan and sales plan should evolve accordingly. Early stage funders must feel comfortable with ongoing changes and should encourage founders to make those changes.
The founders / funder relationship will degenerate to a lack of transparency if either side resists this change. The budget, and the plans that it is built on, will be based on incorrect assumptions. This is management by hope.
4 — Define Quarterly OKRs
To finish the planning process, the last step is to go deeper by zooming in on specific quarterly objectives and quantifiable results. This quick video by John Doerr is a great inspirational message. We encourage all founders and funders to also watch Rick Klau video and transcript on OKRs.
No two founders apply OKRs in the same way, but during the years this is what we have learned:
1 — There is a main difference between MBOs (management by objectives) and OKRs (objectives and key results). This is a great post on the topic.
2 — When the company is still small the OKR quarterly meeting is a great forum for all the employees to participate. It really helps to build and reinforce the company culture.
3 — A key advantage of OKRs is that they help a lot with alignment: this means better communication, clarity and purpose for the whole team. In order to facilitate alignment the starting point is to identify 1 to 3 quarterly company wide objectives. Founders find it very difficult to define the “theme” of a quarter with only 1 to 3 objectives. Especially in the early stage of the company building process this is an absolute must. The best funders can be great sounding boards to founders to think through company wide objectives.
4 — Founders tend to use different alignment methodologies. Some great blog posts on the topic are this or this or this.
Founders apply the above planning cycle in different ways depending on the nature of their business, their expertise and the level of maturity of the organization. To be credible and relevant sounding boards, Funders should really be adopting these techniques to run their own businesses.