There are a few truths about founding a startup. You’ll work longer hours than you thought possible, you’ll be surprised at how many people fit into a three-person office, and managing your runway -- how far into the future your money will take you -- is just as important as any other part of your business.
It might seem like common sense, but the day-to-day workings of a business that take your attention, like building a product and growing a customer base, make it easy to overlook the big picture. Big picture as in making sure you don’t run out of money before you’re able to secure more -- or have to downsize or completely pivot.
Managing your runway doesn’t have to be hard. After all, dogs do it. But you have to stay on top of it and know the areas to be diligent about along the way.
1. Watching your growth.
More From Entrepreneur.com
It’s hard to overestimate the value -- and I mean that in every sense of the word -- of growth in a startup. There are a few ways to raise money for your business. If it’s a mom and pop business, you can take out a small business loan or borrow from friends and family. That allows you to have a slow burn toward profit and repayment.
Venture capital firms, on the other hand, are investing potentially millions of dollars and want aggressive month-over-month growth. It’s your job to give it to them. Consider this: thanks to compounding growth, a company with 20 percent month-over-month growth will be 80x larger after two years than a company with only 10 percent growth. Can your current growth get you to your next revenue milestone? If your runway isn’t long enough, that’s when you crash the plane.
So clearly, growth is important. But just as important is the cost of that growth. Whether it’s a fixed cost per customer acquisition or a percentage of revenues that’s your cost of sales, it’s not enough to just know that you’re growing, but that you’re spending less than it’s costing you to grow.
How do I keep PolicyGenius on track? With this simple table.
The values in the cells are how much cash the company would cumulatively burn over 12 months. Every week, we look at how fast we’re growing and how much that growth is costing us. If the cost is exceeding our target, we slow down growth to get things back to where they’re supposed to be. If the cost is below our target, we celebrate -- cost-effectively, of course -- and hit the gas.
Things won’t always go your way when you’re acquiring customers, but if you keep an eye on your growth and cost of growth, and can make adjustments on the fly, you won’t be surprised in between revenue-raising milestones.
2. Managing your budget.
There are a lot of different aspects of growth. It’s building out products and services, handling customers, marketing and hiring people to actually do all of those tasks. Did you notice the common denominator in those? They all cost money.
That means outside of customer acquisition costs, you also have to watch the rest of your spending. That seems obvious, but you’d be surprised at the number of founders and CEOs who don’t stick to -- or even have-- a 24-month budget.
Your budget should include your forecasted cash receipts. It should be a conservative and realistic view of your company’s finances, not the optimistic number you tout in a TechCrunch interview. Your budget shouldn’t include running your bank account to zero with the plan of just raising more money. Burning your candle all the way down to the base isn’t advisable. You don’t know what will happen to the markets over the course of those 24 months, and it’s easier to raise money when you don’t need it.
But it’s hard to plan that far ahead, especially in a startup where every day throws new challenges at you. For me, it’s easier to start at your 24-month growth target, and work backwards on what it’ll take to get there. How much do you need to spend to hit your next major revenue milestone? Who do you need on your team? Working backwards from your growth target can help form the basis of not only your budget, but your hiring plan.
In addition to the long-term view, it’s good to exercise daily discipline, focusing on making small changes and good decisions that can add up. I’m a big fan of “the 2 percent change.” Make incremental 2 percent changes -- in your travel budget and office budget, for example -- and you’ll see real changes in your bottom line and start to create a more thoughtful culture around spending. If you cut a little from multiple areas, you can save yourself from having to make big cuts to one area, like payroll.
Of course, you can avoid cutting things if you don’t fall into the trap of overspending on them in the first place. That’s where knowing your nice-to-haves versus your must-haves comes in. This can be a fine line between team morale and flat out extravagance, so know when you’re crossing it. Providing free in-office snacks keeps people full and happy, but startups are known for unique and quirky office accoutrements, which can quickly become a slippery slope.
Oh, and speaking of slippery slopes, don’t buy an office slide.
3. Hiring the right people -- at the right time.
It might seem like the work never stops at a startup and, well, that’s because it doesn’t. That makes it tempting to throw new bodies at a problem. But if you hire too quickly and revenues don’t behave the way you predict, a huge payroll becomes a huge liability.
The nice-to-haves versus must-haves is a conversation you have to have when it comes to employees, too. Hiring a new employee for a role or project can be tempting, but ask yourself a few questions first, like:
Is this work that needs to be done now, or is it something that’s six or twelve months down the roadmap? Even if it’s a crucial piece of your product, it might still be a nice-to-have at that particular time. When it becomes a must-have, revisit hiring someone to take it on then.
If it’s work that has to be done now, is a new hire the best way to go? You might be better off distributing the work to your existing team. Not only will this save you the cost of an additional salary, but you can use expertise that’s already in house, and give current employees the chance to take on new projects and leadership roles.
The easiest way to structure your hiring is around revenue milestones. We like to use the analogy that building a company is like climbing Everest -- and that we should focus on what we have to do to hit the next basecamp, where we plan for the next basecamp. Hire for the must-haves that will take you to the next milestone and hold off on hiring anyone else until that’s hit. Once you reach that next benchmark, evaluate your must-haves again, and repeat. That’ll keep you from one of the most-dreaded jobs of a CEO -- laying people off.