A new way of budgeting?

I am reading The Startup Way by Eric Ries. He applies his seminal framework of the startup life cycle to make a compelling argument for creating startups within existing organizations.

Ries talks about a concept of metered funding. This is in contrast to traditional entitlement funding. In the latter, teams are funded through a central budgeting process, typically annual. Teams make a case for their importance, management considers all projects simultaneously, and then allocations are handed down for the duration of the year. Rarely is there an adjustment to these budgets, except in times of hardship or downturn, when they are reduced across the board. Thus, each team feels “entitled” and endowed with the budget they are allocated, and actually face little incentive on a day-to-day basis to take risks and accelerate projects, because the budget is guaranteed to flow.

The startup model

Metered funding works more like a startup’s funding process. Entrepreneurs share with investors the goals and milestones they are hoping to achieve with each round of funding. In the early stages, these milestones are typically learning based. In late stages, they are outcome and growth based. In all cases, they are clear and often quantitatively measurable. When investors agree to fund the venture, they write a check. There are two notable features of this agreement:

1. They can’t take the check back
2. They aren’t committing to write any future checks

These two features create powerful behaviors for the entrepreneur. First, she is free to pursue the goals in with any activities she wants — experiments, team members, business models — and she can even “pivot” to new activities if she thinks there’s a dead end. The investor has very little say.

Second, because there is no guarantee of future funding, the entrepreneur is thrifty with the finite resources she has, and is compelled to create validated learning — results — that will allow her to repeat the funding cycle and attract new investors again in the future.

The team model

Within organizations, the budgeting and funding process for teams tends to resemble the entitlement model instead of the metered model. The result is that organizations miss out on the benefits of the startup model: freedom, thrift, and validation. Teams feel micromanaged, they waste because funding seems to be a guaranteed stream, and they don’t produce validated learning or results.

With all the above, I am pondering how WorldCover can best apply the metered funding model to some of our internal budgeting decisions.

We are a distributed team with operations across various countries (Ghana, Uganda, Togo, and others) and key activities (regulatory approvals, growth, research, technology). In Ghana, we have over a dozen team members working across product, marketing, government relations, and customer service. The way we allocate budget to activities in Ghana today is by choosing a fixed monthly expense per key activity, for example: $10,000 for compliance and regulatory (a completely made-up figure).

One couldn’t fault the team engaged in this activity — let’s call them the “regulatory team” — for feeling that they are entitled to this $10,000 each and every month, assuming they are doing a “good job” by traditional management standards — moving the ball forward, not screwing up, showing good effort and professionalism.

However, if the regulatory team were actually a startup, they would have presented a clear set of milestones (e.g. obtain brokerage license), timeline (e.g. 6 months), and budget ($50,000 + 2 full time employees). And the investor would have written a check or not written a check depending on whether this plan made sense and had an attractive enough ROI.

A new model

I am thinking of a new model for funding for teams within the organization, including small startups like WorldCover. The process should look like the following:

• Start with the objectives for the company and key activities required to achieve those objectives (e.g. “increase monthly acquired customers 2x”). OKRs are great for this.
• Assign an internal startup to each of these objectives — call it a “team” (clever, I know).
• Assign each team a leader
• Ask each leader to present a plan that includes (1) the objective and the milestones it will be measured by, (2) a timeline, and (3) a budget.
• The budget must include units of people and dollars

Then, approve or reject the plan. If approved, “fund” the team by allocating the requested budget. The team can spend it however it wishes, up front or over time, but it cannot exceed the budget! If rejected, well, ask the team to try again, or find another leader. 😞

The results of this should look like a portfolio of startups, sharing a pool of resources of people and funds:

• Each startup is a “team” with a purpose. “Marketing” is not a team with a purpose. “Increasing inbound leads” (by 5x over the next 3 months) is a real purpose!
• Everyone at the company will be allocated to a team or perhaps allocated partially across several teams
• The company’s equity will be allocated to activities-in-progress (plus vaguely planned future activities)

What remains to be determined is how are the shared functions of a startup funded? Office space is occupied, AWS compute nodes are spun up, team members take an Uber now and then.

I don’t have a great answer at this time, but I would suggest that if the above process is run correctly for all the key activities, then it will be clear what percent of the company’s burn is actually going to core vs non-core activities. I’m sure that for different companies and contexts the number can vary from 5% to 30%, but at least it will be explicit.

What do you think?

Originally published at www.worldcovr.com.