We entrepreneurs sometimes feel victorious after we have raised capital from family, friends, angels or VCs.
But the pressure and the hard work are just beginning. You have to stretch those dollars until you get to cash flow positive, and it is always difficult to do so. The worst case scenario is to run out of cash before you have built the product or successfully sold it to real customers. Or you are just starting to get customers, but you can’t afford to spend more money on sales and marketing to attract more.
You have to plan smartly and watch expenses carefully and have contingency plans to avoid burning through your capital.
The biggest mistake we usually make is to hire too many full time employees and get a burn rate that is too high. Our optimistic projections assure us that we will be okay, but it usually takes longer than we project to generate enough revenue to support our entire staff.
Some possible solutions for this are: 1) hire contractors and only when they are needed to do a specific project, and 2) outsource development work to low-cost outsourcing companies, 3) try to hire a commissioned based sales team and add headcount only as they are needed to support actual customers.
Another option is to work with your full time staff on a milestone based plan. As revenue and profitability milestones are achieved, provide them with pay increases or increased equity. But on the other hand, if the milestones aren’t achieved, planned-for cost reductions (decreased salary or decreased hours) may automatically go into force.
One of my friends has a brilliant way to keep his costs down and to give his employees upside. Dan Oaks from DVO.com allows his employees to buy into his profit-sharing plan on a monthly basis. They risk some of their regular salary to buy the right to share the profits if the company meets or exceeds its goals. He has seem incredible results from the team doing everything possible to share in the bounty by making sure the revenue goals are hit each month. If the company doesn’t hit its numbers, its payroll actually goes down. This idea works great if you have fairly consistent revenue and want to grow it faster, with full support from your team.
An incredibly important idea is to phase in employees as they are needed in the correct order. A recent article from Silicon Valley discussed that many software companies scale up a full-fledged sales team (with the burn rate that entails) before they have proven the best way to generate sales. Start small, see what works, and then scale up quickly when adding sales headcount adds to profits. Early on, sometimes sales headcount can be a cost center. That is a formula for disaster.
Another fall back option if the runway doesn’t seem long enough is to do outside development projects — for example, get a contract project and use your staff half time working on someone else’s project.
That is not ideal, but it’s better than running out of runway.
Spending a lot of capital on office space, equipment, and other overhead costs can be disastrous. But there seems to be pressure on companies who have raised money to look more professional, to move into expensive office space, and put on the appearance of success.
Avoid this pitfall. Stay as lean as you possibly can. Rent cheap space or work from home virtually. Use online project management software to manage your team. Do guerilla marketing. Use email and LinkedIn to people you know to reach potential customers and partners. Put in the hours and hours of hard work turning over stones to find revenue.
I’m increasingly anxious about the burn rate for the various Provo Labs startup companies. I’m blogging today as much to remind myself of what I believe in as I am to make sure the entire Provo Labs family understands the our philosophy of using seed capital as a runway to positive cash flow, and that our own funds are limited.
All of us need to be thinking day-in and day-out about where our revenue is going to be coming from. We are in the middle of determining the amount of capital available to our various portfolio companies. It has to be enough to get us to cash flow positive or to a larger funding round (if growth capital really is required to have a big success.)
All employees and contractors need to be sales people for our companies, helping us find revenue from real customers.
And if revenue doesn’t come readily, then we must be prepared to find creative ways to reduce costs and build a longer runway so each startup can survive first and thrive later.
We want each startup to live to see another day. Because when a startup really does hit the J curve, everyone wins. And that is a rush.