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Thursday, July 05, 2007

Controlling the burn, the cash burn that is


Controlling the burn

I found an interesting post by Seth Levine, on controlling the cash burn, this is the life blood of an early stage company and is the one thing it can control, it may miss the revenue / sales forecast, but it should be able to meet it's cash burn profile.


You’re burning too much money By Seth Levine
I don't know much about your business but I'd guess that you're burning too much cash.
Ok – that's an over generalization but it's also probably true. Businesses – and particularly early stage businesses – have some kind of gravitational pull towards spending too much money. Some of this is just the nature of entrepreneurship – entrepreneurs tend to be optimistic people who believe strongly in their business idea and their ability to grow their company. Some of this is that spending less money by definition means making trade-offs and potentially slowing down. Some of it may be left over exuberance from the Internet bubble when businesses were rewarded for spending cash faster and looser. I don't know all the causes, but it's almost universally true.
Unfortunately, unless you have unlimited funds, spending too much money early means that you may not be around if your market takes longer than expected to emerge (it will), your technology doesn't work the way you thought it would (it won't), your sales cycles turn out to be longer than planned (they will be) and your funding harder to come by than you anticipated ('nuff said).
While there have been plenty of times over the years when I've avoided this pitfall, there have also been plenty of times when I've completely ignored what I know to be true about early stage company spending habits and allowed things to get farther along than they should. I always look back on these situations with frustration because this is something that is completely preventable. It's rare to be sitting around a board table saying "I wish we had ramped up the burn earlier –we're really paying for that now"; it's much much much more likely that you'll be kicking yourself for spending too much too soon, before you really had a good handle on the most efficient way to use the money. That extra few months of cash burn could really come in handy right now…
Everything in the start-up world is relative and your spending will depend a lot on your funding situation, you industry and the stage of your business. That said, below is a quick rule of thumb for web/Internet/software businesses at various stages. If your net burn exceeds this amount (where burn = actual change in cash month/month, not GAAP and not gross expenses) or if you have less than 6 months of cash in the bank at your current burn rate and don't have a funding plan in place, take a look at what you're spending:
seed stage: $40k/month
angel stage: $100k/month
early venture stage: $250k/month
venture stage: $500k/month
I've rarely had success in businesses that ramped their spending above $750k net a month – it's just too much money to be spending for any extended period of time in the name of "market acceleration". I've had lots of experiences where we've kept spending below $450k/month and had great success.
So please be careful with your cash. It's not that it's bad to spend money – it's just that it's bad to run out of it.
Slainte
Gordon

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