How does startup's CEO balance conserving cash versus building technology from the ground up.
Don’t worry: This post is not about giving you tips to start saving money for your retirement. This post is addressing the difficult subject of how the CEO of a startup might try to balance between saving –– in other words, minimizing the risk of running out of cash –– and spending. That is, investing into building new technology that presumably will propel his or her company to great success.
I’m sure I’m not alone when I confess to having had more than one sleepless night worrying about the company’s cash balance as a startup CEO. The situation we are discussing here is the early stages when the company is not yet break-even and is burning its precious cash resources. During those early stages, one number is omni-present in the CEO’s mind: The “out of cash date.” It is also sometimes measured as the “runway” or length of time to reach the out of cash date. A pretty self-explanatory concept that investors track almost as closely as the CEO and gets reviewed at the board meetings. It also gets scary once the runway drops below six months.
I always found it difficult and struggled with whether to focus on immediate needs (saving) versus investing in the future (spending). For example, if I choose to preserve cash today, I need to do so while looking ahead to the future to keep pace with the industry and customer needs, not an easy balance.
As a startup, the objective is to survive through the release and initial sales of the first product. These days, many startups have bootstrapped themselves or taken small seed funding to get them through this period. The runway is typically one to two years at the start of the product development. At this stage, the “spend or save” dilemma is focused on how many resources to deploy for the product development. Hire one or two more engineers? Buy more licenses of a critical software tool? Get more compute power?
Once the product has been released, the objective moves to selling it and investing in the channel, and here it starts to get trickier with the addition of this new parameter. If the startup is in Silicon Valley, it’s a reasonable assumption that someone in the company knows a project team in need of this kind of technology. Quickly, though, there will be an international pull because of big development clusters in Asia or Europe and the attraction to travel overseas or even open an office in one of those regions becomes irresistible. Often the team finds out that the product is not quite perfect and another round of product improvements is required to meet the customer needs.
The sales channel needs leads to fill the pipeline and that means marketing and promotion, visibility and awareness through the website and content creation, advertising, events and public relations. All valuable activities that should accelerate the revenue ramp.
Costs skyrocket and the company begins to run out of cash. All of a sudden, the ‘out of cash date’ completely overwhelms your kids’ birthdate in your mind!
It’s at this point where I wish I could pull out a magic template to avoid the often-made mistakes of startup founders who squander venture capital investment, but I don’t. Instead, I’ll offer a few observations on sound investment management efforts I’ve witnessed over the years.
As I’ve mentioned in previous posts, startup executives would be well advised to not make those critical decisions in isolation. Board members are the first place to look for help; mentors can also be a great resource. An experienced board member or mentor can serve as a good sounding board because he or she will have a global view of the industry and a wider perspective. Consultants, customers and partners could be sought out as well.
Next up is the budget. Judiciously setting goals and objectives that are tied to measurable results is important for all companies, but especially startups. I would recommend a systematic assessment to determine the outcome of every line item expense in the budget. Cost overruns should not be tolerated.
Working smart is important: Some founding technologists fall in love with technology and insist of building it when it can be outsourced or a “ready-to-use” solution exists. A perfect example of this concept is IP. An entire industry has grown up around supplying design pieces that can be used by other chip companies to shorten the development cycle and conserve cash.
Balancing spend versus save when building a business is a difficult problem and one that that has no easy, pre-packaged answer. While I struggled with this balance as a startup CEO, I also reached out to trusted advisors for help and worked hard at maintaining a reasonable budget that met objectives.
— Michel Courtoy is a former design engineer and EDA executive who sits on the board of directors at Breker Verification Systems.