Walking the Tightrope of an Early-Stage Startup
Founders and operators of young companies walk a thin tightrope to success; they balance and inch forward, shift one way, lean precariously the other way, rebalance, and continue forward — hopefully never falling off. There are a million strategic decisions to make along the way, and sometimes the advice you hear one day directly conflicts with the advice you read the day before. In the early stages especially, it’s hard to know in which direction to lean because you have no historical data or experience to back you up —you don’t know which way the wind will shift to help support you or cause you to stumble.
Balancing is key. Companies need to have the agility to lean in and test one direction, but always quickly rebalance. Here are four examples of the strategic startup balancing act.
1. Balancing aggressive but achievable growth targets
’Tis the season for yearly planning. One of the biggest balance games you’ll play is finding the right revenue targets for the coming quarters. You want to aim high enough to hit certain milestones and push the team to grow fast. At the same time, targets need to be achievable — missing revenue goals quarter after quarter is tough on employee morale and is a red flag to investors. You also don’t want to operate your business to a revenue plan that is unattainable, as expenses will quickly eat up your runway. Which leads into the second balancing act…
2. Balancing hiring with sales growth
I often read posts urging growing companies to hire out ahead of their sales goals — certainly valid advice. You need to make the math work: have enough sales reps with achievable quotas to hit the company’s sales targets. And don’t forget ramp time! On the other hand, people-expense is the hardest expense to cut back on. If you haven’t found product-market fit and a repeatable sales model, you don’t want to hire too far in advance of a lofty sales goal. Missing those goals results in expenses that are disproportionate to your revenue growth, and you’ll be burning cash at a much higher rate than expected, which is not ideal. Yet good talent takes time to find and you need a plan in advance. Balance is hard!
3. Balancing adding new customers with adding the right customers
I recently read a blog post that emphasized only saying yes to the right customers—but let’s be honest, this is a luxury that most early-stage companies don’t have. In the beginning, you’re doing everything you can to bring on any and all new customers as long as they pay. Bringing on the wrong customers is certainly costly — they take up more of your team’s valuable time and run a high risk of churning, leading to a poor LTV:CAC ratio (more costly than they’re worth). But in the early stages, it’s hard to say no to a new deal just because you aren’t sure they’re the right customer; you’re still defining your ideal customer profile. Once again, balance is key — keep adding customers and growing sales, but be aware that wrong customers do exist and your team’s time could be better spent elsewhere.
4. Balancing fundraising and valuations at the right amounts
When fundraising time comes around, the biggest round you can raise at the highest valuation you can secure is, perhaps surprisingly, not always best. Raising a round means selling a portion of the company, and obviously selling a smaller portion for a higher price is more desirable than the alternative. But since your valuation should keep increasing with each subsequent round, an unreasonably high valuation now means it will be that much harder to deliver value to your investors in later rounds. Additionally, raising too much cash can be as bad as raising too little (alright, not as bad). If you have too much cash, you have more time to hit your next milestone, but in the high-paced world of startups a cash-out deadline can be a motivator and should increase capital efficiency. And since you’re selling off a portion of the company with each investment dollar you take in, you should only sell as much as you have to.
Finding the right balance requires continuous evaluation and readjustment. Conflicting advice can even be reaffirming— if you’re hearing recommendations from both sides to readjust your targets, hiring, burn rate, and fundraise, you’re probably somewhere in the middle, which is where you want to be.
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