Early-stage startups have a constant battle of managing their cash-out dates (when they run of capital) and spending enough to make progress on their business plan.
It’s not an easy balancing act.
Of course, we recommend that all startups have a financial model that projects their headcount and another spend by month. As we’ve said before, a startup’s financial model should be more than just an accounting exercise. Make sure you include your business’ KPIs, the metrics that will show you if your company is on the right track.
One strategy that many well-run startups use to manage their burn rate is to tie increases in their spending to milestones or KPIs. Every new hire or recurring software commitment increases the amount of capital that goes out the door every month, boosting the burn rate. By tying major spend increases to specific KPI accomplishments, founders gain more control over how much cash their company uses.
An example of tying a milestone to a spending increase is waiting to hire a third sales rep until you’ve proven that one of the first reps can meet a quota or make the sale without founder involvement.
Other milestones that can tie to expense increases include:
- Signs of product-market fit
- Particular number of clients
- Regulatory approvals
- Sales and Marketing “market fit”
- Feature release momentum
- Major customer renewals
This is a really good strategy for times when capital raising is scarce, such as a recession.