last week i wrote about strategy and vision and received alot of great feedback, so thanks everyone. One of the emails and requests for a post was in regards to burn rate. Specifically what we do to control our burn rate and advice for other entrepreneurs.
Burn rate on Wikipedia is defined as a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down also synonymous for negative cash flow.
My thought for the title of the post “The Law of Burn Rate” is based on the correlation between burn rate and time and ultimately success. I believe that most companies have great plans, but they need time to execute upon these or the time to figure out where their assumptions were wrong and then change to address their market properly. So lower burn rate equals more time and ultimately success.
In todays business climate, you can only control so many things: your staff, your attitude, your strategy, and your cash management. You can’t control your competitors, the economy, your customers, etc so a lot of success is based on right timing and execution.
Deepu John of Isherpa Capital gave me his thoughts on Burn Rate and i also know an entrepreneur’s philosophy on this is a key factor in whether he will consider a deal for their portfolio.
“There are a lot of external factors that a startup cannot completely control – the market, the business deals, the economy, customer cycle times, etc. However there is one thing that every startup has complete control over – burn rate. If burn rate is not controlled effectively and intelligently, every other challenge becomes magnified and the risk on the startup increases – in fact, most often, it can be fatal. If higher burn rates were the path to success, most of the internet startups during the internet boom would have done very well. Despite its importance, controlling burn rate is overlooked in a lot of startups – since it raises very difficult and painful questions to ask and answer. But not dealing with it leads to even more painful results. The most experienced entrepreneurs know how important this is and are very careful with burn rate. And they manage it carefully in up markets and down markets – and it doesn’t take a down market to have them look at this. “
Controlling burn rate is also crucial for staff morale and confidence. If the company over spends and then lays people off, the rest of the staff is waiting and wondering if they are going to go to the dead pool. As a result they are less productive and sometimes jump ship early. Imran Bashir speaks to this point in a 2007 blog post.
Here are my tips and advice I’ve compiled from mentors and other successful company founders:
- You can provide cool company perks that don’t cost a lot of money. Host Friday Happy Hour $2-3 week vs catered lunches every day $50 per week per employee.
- Reimburse health insurance $150 a month vs. offering corporate health insurance. This is not a long term plan, but in the first 2 years this can reduce costs $100-$300 a month per employee
- Find large inexpensive office space with flexible terms. Great corporate office space is a reward for profitable successful companies and its boring. Look for warehouse space with short term leases. It is available in every market and you can have a lot of fun. Ping pong tables, lounge rooms, and the flexibility to grow or move out in 12 months.
- Get a little bigger space than you need and sublet your extra space to start-ups. You can offset your rent or make money off your space. We are doing this with our boutique co-op concept.
- Only pay yourself as CEO or founder what you need to live without stress. Peter Thiel talked about how low CEO pay is a great indicator of start-up success and how this is a key point the Founders Fund looks at for investment. You need to live, but getting rich is from the exit not someone else’s investment. Your responsibility is to get a return on your investors money and in turn manage your cash.
- Lastly and for fun, come up with fun ideas for team bonding and encourage your team to do the same. Our developer Seth surprised us Friday by buying lunch for everyone and bringing a trampoline to the park by the office for a lunch time break. Expense – $0, company morale – priceless! Thanks Seth.
So enjoy the process but focus on the end in mind and be a smart leader. Great respect and success can come from financial leadership.
Lastly Good Book: Burn Rate by Michael Wolff
Jimmy Hendricks
patrickdillon
Well said Jimmy. These are great tips, and I see no downside for employees. In the beginning you should be focusing on talent and you don’t need $1000 chairs and catered lunch to get it. I really believe that. There is something magical about building something from the ground up. I know it motivates entrepreneurs, and it also excites employees. Starting out in a warehouse, garage, or basement has almost a stealth feeling to it. The whole team can feel like theres something brewing while they look forward to “making it”. And they are each a special part in creating each others success. If your company is just starting out but you’ve already got the posh office your projecting the idea that it’s time get cozy, relax, cause everything’s taken care of, there’s less sense of urgency.
Even companies that are glowing with success can maintain this excitement. I remember walking down a seedy-looking alley in San Francisco, walking up some stairs and opening the door into Method’s headquarters. The lobby was slick (and ultra clean of course) but the kitchen was homey, with photos of staff pinned to the wall. The main work area contained several rows of simple desks with personal touches at each workstation. There was a prototyping machine on site with latest designs nearby that they had cranked out the night before. Oh and I can’t forget the lounge covered in faux grass and sprinkled with bean bag chairs. Everyone was friendly, with an air of positive urgency. I had a great working day with colleagues and Method staff, including Co-founder Adam Lowry, whom I spotted on my way out, taking a seat at his workstation, right next to everyone else.