Thread
Do you feel good about where every dollar your startup spends is going?
If not, why haven’t you stopped spending those dollars yet?
This is a somewhat obvious but often unasked question that startups should ask in an era of tighter capital.
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If not, why haven’t you stopped spending those dollars yet?
This is a somewhat obvious but often unasked question that startups should ask in an era of tighter capital.
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The ability to incur deficits and invest for the future is one strategic advantage that venture-backed startups possess. Still, it’s important to scrutinize each dollar spent and have confident expectations for its ROI.
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It’s worth stepping back to appreciate the scale of spending at some startups.
A Series A startup might burn $5M in venture capital and generate $5M in contribution margin over a year.
In this case, gross expenses are $10M - this is, objectively speaking, a lot of budget.
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A Series A startup might burn $5M in venture capital and generate $5M in contribution margin over a year.
In this case, gross expenses are $10M - this is, objectively speaking, a lot of budget.
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Most founders aren’t used to spending at this scale.
The magnitude often leads founders to think more abstractly than they would in the context of their family budget or compared to an earlier startup phase
It can feel almost like monopoly money & lead to magical thinking.
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The magnitude often leads founders to think more abstractly than they would in the context of their family budget or compared to an earlier startup phase
It can feel almost like monopoly money & lead to magical thinking.
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And inertia can be a powerful force! The mood of the 2021 growth-at-all-cost environment may still have inertia in startups that haven’t fully digested how much the cost of capital has risen. This is can cause a perilous problem.
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For instance, one company I backed raised about ~$12M in VC. Yet, they burned $1.5M over three years attempting to establish a European office that never came close to unit profitability. Why? Because it seemed like something they should do eventually – why not start early?
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It was a defensible decision at the time. Unfortunately, the team spent over 10% of its total capital on an initiative that was ultimately shut down to reduce burn. Consider instead how those same dollars could have compounded value on a more confident investment.
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Those same dollars could have hired more engineers, been used on better-performing marketing channels, or simply held in reserve until better investment opportunities became available. And this wasn’t the only example of poor spending.
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This poor decision was equally on the investors who were pushing the company to grow aggressively. So they traded over 10% of the company’s total capital for a short-lived bump in topline revenue vanity because we "had the capital to spend."
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Maybe benefit of hindsight? But the unsustainability of the project was evident in realtime. A grow-at-all-cost mindset simply led to a poor decision. The company had numerous projects that looked like this. Most companies do, even in periods with very high costs of capital.
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I don’t advocate for zero-based budgeting, but too many founders let inertia cloud their judgment and just keep sinking money in bad places year after year.
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It’s more important than ever to understand the difference between experiments and scale-up investments. The costs of experiments should be very low and the confidence bar for scale-up investments should be pretty high. Neither has been true at most startups in recent years.
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I encourage founders to be brutally honest about their spending. Casting a critical eye will lead you down uncomfortable paths. You may have to part ways with people that you recruited, who you like, but aren’t part of projects that are meeting expectations.
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You may have to cut initiatives that you believe in and championed.
The startup margin for error is often small, and all resources must go to projects with the highest ROI.
These are painful decisions, but startups always operate with limited visibility & tough tradeoffs.
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The startup margin for error is often small, and all resources must go to projects with the highest ROI.
These are painful decisions, but startups always operate with limited visibility & tough tradeoffs.
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Remember that genuine confidence (not capital) should be the only currency of acceleration at a startup (techcrunch.com/2019/08/13/confidence-the-currency-of-acceleration/).
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And every dollar that we spend that doesn’t create more than a dollar of value, is dilution (techcrunch.com/2018/07/20/redefining-dilution/).
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