Congratulations on raising a round for your startup! Now you likely have some budget to grow the team and the company. My firm’s clients’ have raised over $2 billion dollars in early-stage funding, so we’ve seen a lot of businesses try to figure out how to best use their funding.
To answer the question, “As a newly funded startup, where is the best place to optimize your “runway” period?” I’d say start with a clear articulation of your company’s strategy. You need to have a vision of what your long-term strategy is and what you need to do to achieve those goals, so that you can build a budget to manage your burn and optimize your runway.
Why do you need a budget? Because knowing where you want to spend, and how those choices impact your burn, is critical to managing your runway. If you don’t have a plan you are way more likely to blow through the cash too quickly. OR you may fail to spend what you need to spend to achieve your goals (which, ironically this can also cause a startup to fail - if you can’t hit the goals you need to hit to be in a place to raise the next round the company might not make it.)
Revenue may or may not be an important part of your projections. And even if you are generating revenue, it may not be meaningful enough to cut your burn - depends on how much revenue and how high the margins are. Regardless, if you are something like a SaaS company, you’ll likely need a particular set of revenue and revenue growth numbers to raise your next round. Build your budget based on the targets you need, then carefully analyze your variance to adjust your spending as necessary.
As far as costs go, every very early-stage startup spends >80% of their money on 3 things: Payroll, Rent, and Contractors. (Note that you may have some nasty legal expenses from your recent fund raise also). If you can control those spends, you can control your runway.
- Payroll: people are expensive. Hire the very best people that you can and pay them well. Always take quality of people over quantity.
- Rent: rent is expensive, so consider having some remote people, using a WeWork or headquartering in a city other than San Francisco or New York.
- Contractors: contractors are expensive… but less so than employees. You don’t have to manage additional rent/desk space, equipment, or training. You will also feel less likely flexing their hours/spend, although in turn they may give you less loyalty.
Good luck with your new fund raise, and check out the video my VP of FP&A Healy Jones made on building a startup budget:
You can also download a free startup budget Excel file here on my firm’s site.
