Is money tight at your startup? Keep an eye on your burn rate and decide where to invest your budget for the best ROI.
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Becoming a startup founder, you may get allured by the Silicon Valley’s promise of the “overnight success” and making billions of dollars right away.But then – reality hits hard.For majority of startup founders, securing budget—be it a bootstrapped or VC-backed company—is a tough ride. So if you’ve managed to fund your startup, you need be aware of the risk of burning cash too quickly. And you should be – as CBInsights found, running out of cash is #2 of top 20 reasons startups fail.
Burn rate to the rescue
Luckily, there’s a way to keep an eye of your spendings, especially if money is tight, and it’s your startup’s burn rate.Burn rate indicates a pace at which a company is losing money, before profits cover your losses. Monitoring this metric will help you to decide which activities may not be necessary at the moment, as they don’t produce desired ROI.Let’s say that your monthly gross spendings reach $100,000, covering your office rent, employee salary, equipment lease, etc. This amount of money is your gross burn rate. So, how to calculate a project burn rate? Use this simple equation:
Net Burn Rate = Gross Burn Rate — Monthly Revenue
Let’s say that you already have some beta version of your product, which already makes $10,000 a month in profit. Your net burn rate is then $90,000. If you’ve managed to secure series A funding totaling $450,000, your net burn rate allows you to operate for 5 months before you run out of money.
Reduce your startup burn rate to buy yourself more time
Looking at our example, 5 months is not that much time to develop your product and grow your startup enough to make profits. If you manage to reduce your burn rate, you can buy yourself more time to grow your company.Here’re some ideas to reduce startup burn rate.
1. Don’t overspend
Securing fundings from angel investors, Venture Capital, or Venture Builder certainly makes you feel bigger already. This delusive feeling of having now hundreds of thousands on a bank account may make you more careless with money. Our first advice is simple – don’t let yourself get caught by the allure of this new-found wealth and focus on the ROI of every penny you spend. Making a new investment, check how it would improve your customer acquisition, conversion rate, life-time value or any other KPIs you track to see how your actions affect growth.
2. Aim for an MVP first
As you’re probably very passionate about your product (which you should be), it’s tempting to develop it all at once. You’re certain about your idea’s potential. You have money to cover design and development. But even though you could create your whole app or website at once, more often than not you shouldn’t.A good idea is to create an MVP, which stands for a Minimum Viable Product. It is a version of your product consisting of the most important (or core) features, so you can develop your idea quicker.Creating an MVP first gives you many advantages:
- Software development is cheaper, as you only need to implement core features.
- You can go to market quicker, testing some assumptions about your idea with your target audience.
- You already have a product that may bring profit, so you reduce burn rate for future development.
- You can use it to back your efforts of seeking further investments from e.g. VCs.
The good thing about an MVP is that if it succeeds, you already have a base product you can improve. But if it fails, you can pivot more easily, losing way less money than if you’d built your product all at once.
3. Outsource software development
Building your own team from the ground up is also very tempting. But truth is, hiring in-house is expensive. Stuff salaries, a rent for bigger office, equipment lease or higher bills – now you get the picture of how hiring employees impacts your spendings. At the beginning of growing your startup, there’s a lot of better ways to spend your money than electricity bills or rent. Outsourcing software development – among many other advantages – lets you control the budget.Plus, oftentimes you may need some resources for a limited time. Spending time and money on hiring them only to keep them on standby is not the best idea. Outsourcing, again, gives you an access to resources only when you need them.Given their experience in various IT projects, remote tech vendors may suggest better solutions based on their knowledge. Therefore, you may benefit much more than just by paying less for programmers (have I mentioned the competitive prices of outsourcing companies?). Note:We offer software development outsourcing for digital agencies, SMEs and startups. Let us know about your idea if you want to estimate your project with us.
4. Choose coworking spaces over an office
You may want to rent a posh office to impress investors or to offer your employees a comfortable work environment. Rand Fishkin, in his book Lost and Founder, gives this very example of himself renting an expensive office in Seattle, which added up to costs that eventually drowned his consulting business in debts, making him to move to a coworking space. Why not start with sharing an office with other startups instead? That’s what Apptension founders did, when there were just 3 of them. Only once they’d realized that they have a secured growth potential and their need for bigger office had become obvious, they moved to a new location. Coworking spaces can give you a possibility to meet like-minded founders, so you can share your knowledge and experiences. Some coworking spaces also offer mentoring programs and even funds for promising startups.
5. Focus on "free" marketing channels
Spending vast budgets on AdWords is easy, but it’s more difficult to get a positive ROI, as it takes time to optimize ads and find what works for your product or service. And the truth about paid advertising is that it brings customers as long as you spend money on it.SEO and building a community around your brand are better ideas if you’re short on money. Creating content your audience finds valuable brings you more visitors over time, as the content attracts organic visitors or they share it organically, as they genuinely like what you’re doing.The best thing about running company’s blog is you can do it yourself. That’s how Moz’s founder Rand Fishkin grew his audience before even thinking of building his first SEO tool. A blog was also one of the first marketing channels for Intercom, at the beginning run mostly by its CEO, Des Traynor.It takes time to write good content, but at least this is totally under your control. For example, you can share your expertise as a CEO, introducing the audience to your product or service.
6. Track your KPIs regularly
To avoid reaching your startup burn rate, you should monitor your spendings to see if they actually have an effect on your company’s bottom line. For example, spending money on a conference booth or paid content, track conversions from these channels and assess, whether this investment paid off or not. This way you can make better decisions regarding similar spendings and invest your budget where you see a positive return.At the same time, don’t get yourself caught into a trap of “hoping” something will work. Just because something worked for someone else, doesn’t mean it will for you. If you don’t see growth tracking KPIs you’ve chosen to monitor, don’t hesitate to stop throwing money in this direction and focus on what works for you.
7. Forget about premium tools (for now)
We all know them – popular premium tools that seems like the entire industry uses, that cost even couple hundreds of dollars a month. And as they sure work and it’d be great to subscribe to them, make sure you can afford it.Do you really need to pay for premium tools? If not, consider choosing free SaaS tools that do a similar (or even the same) job, and better suit your actual needs. Teamdeck, for example, is a resource planning software that lets you choose a plan tailored to the number of employees you want to manage. It’s free for teams up to 6 people, and in Business Plan you pay only for the amount of team members you’ve enrolled to the tool. Disclaimer:Although this is a shameless promotion of our own tool, it’s still a good example of how you can choose tools that fit your organization.
Grow at a pace you can manage
One last piece of advice from Apptension is – be comfortable with how fast your company is growing. Going from 3 to 50 employees in one year seems awesome, and for sure there are companies that managed to grow that fast safely.But there are also companies who weren’t prepared for growth like that, which means they haven’t secured funds to pay for growing salaries, a bigger office, higher costs of operation, etc. The growth they’d seeked brought them down.Before you grow, make sure you have all it takes to sustain bigger team.