This article is contributed by Sasha Orloff, three time founder with a background in finance. He's currently the founder and CEO of Puzzle.
For a founder, it is no longer enough to build a great product — you need to build a great business around that product too. Managing your startup’s finances is one of the most important but also most stressful responsibilities of a founder. The good news is there are important lessons you can learn from others before you.
After scaling multiple startups and working with hundreds of early-stage founders, here are five recurring themes I have learned that can help you manage your company’s burn better in these challenging times:
To make confident decisions, understand your numbers. Founders are often concerned about the accuracy of the financial metrics they are using to make decisions. Numbers are the basic truth of a business. If you can understand the numbers, you can understand how your business works. When you understand how your business works, you make better decisions. Confidence in your numbers starts by recognizing it takes effort to validate and structure them so you can easily understand important metrics like cash, burn, runway, and annual recurring revenue (ARR). At a minimum, founders should review financial statements (P&L and Balance Sheet) in a month-by-month format, understand any trends and changes, and check that the amounts and categories appear to be complete and accurate before relying on any metrics calculated from those numbers.
Reframe “spending” as “investments.” Founders often regret waiting too long to cultivate discipline around where they are spending their money. Whether it is a founder or someone else at your company, identify one person who is responsible for thinking about returns on every dollar of investment. You can start by simply asking “is this dollar going to add incremental value to our business?” It is better for you to build this skill now before potential future investors pass because they don’t think you are going to create a great return on their investment.
Don’t sweat the small stuff. Founders can easily get distracted by the minor costs of recurring subscriptions or snacks in the office. Neither will impact runway the way people expenses, office space, marketing, and hosting costs will, but they do send a huge signal to your team that you might be afraid to make the tough decisions needed to make their shares valuable. Should you need to extend runway, four of the top levers are:
- Reducing payroll expenses by cutting headcount or hiring in lower-cost geographies.
- Increasing pricing by testing alternative pricing models or focusing on larger contracts.
- Evaluating marketing by identifying the marketing efforts with the highest impact and cutting those with lower impact, while remaining cognizant of the impact on future revenue growth.
- Negotiating with vendors by seeking discounts for prepayment or adjusting the scope of agreements.
While unpleasant to think of changes to cost structures – and the associated anxiety and guilt – the biggest regret of founders from the other side was not doing it sooner or deep enough to solve for the actual runway extension needed to hit the next milestone. But in all cases, don’t turn away free money like R&D tax credits.
Be in control of your cash and runway. Most early stage startups have not yet built a specific plan for spending money, and investors get nervous about giving money to startups before finance teams are hired or Boards are established. There is no right or wrong number for growth or burn, but demonstrating control over your burn as a founder can be a differentiator to investors. You can think about financials as a view into your leadership around capital allocation, runway management, and fundraise risk tolerance. Providing investors with a strong hypothesis to justify the major categories of spending can be a strong signal that you are focused on worthwhile initiatives. More guidance on calculating burn and runway can be found here.
Always be fundraising ready. Founders of failed startups often regretted being unprepared to fundraise when the company needed money. While others learned too late, you can be proactive in preparing diligence materials such as your financials, cap table, contracts, and corporate docs. When fundraising, it's important to have reached milestones with cash from previous investments and have a narrative that matches your business' market position.
Internalizing these lessons on burn from other founders can be an advantage for your startup's next phase of growth. Founders can greatly enhance the odds of turning a great product into a great business by monitoring cash activity, investing cash for the most high-leverage initiatives and employees, and managing fundraising timelines. In brief: understanding accounting and finance is the underrated superpower that sets the next great founder-CEOs apart.
Puzzle.io is modern accounting software designed to put founders in control. Get real-time financial statements for taxes, startup metrics for fundraising, and traceable cash analysis in a single solution, so founders have confidence in their most important financial decisions. Founders can get started themselves at puzzle.io/mercury, and it’s free for Mercury customers.