The worst startup advice I ever received

When you run a startup, everyone wants to give you advice. Some of it is great, much of it is good, and certainly some of it is just plain terrible. I’ve heard my share of awe-inspiringly dumb startup advice.

In general, well-meaning, completely useless bad advice is just part of the experience. It’s a tax. A tax paid for the right to hear the occasional insight that fundamentally changes your approach or for the authentic moment of shared misery that reminds you that you’re not the only founder to have ever struggled.

Usually bad advice is transparently bad, and ultimately harmless. Sometimes, unfortunately, it sounds like good advice?—?especially when it sounds like advice you want to hear.

The worst advice I’ve ever received was simple, and direct, and utterly destructive.

“You’re not burning money fast enough.”

What is burn?

First, let’s get on the same page about what we mean by burn. Burn is typically discussed in one of two ways: gross burn and net burn. ‘Gross burn’ is the total monthly spend for a company, and ‘net burn’ is the monthly net cashflow (loss) of the company.

Net burn represents the actual depletion in your cash, and when I talk about burn, that’s what I’m talking about.

What did we learn?

This advice came running my first startup. At the time we were early stage?—?pre-revenue, pre-fit, pre-everything. We were struggling to find our place in the market, and frankly, we weren’t learning fast enough. We were frustrated. Our mentors were frustrated. Our investors, no doubt, were frustrated. Someone suggested?—?and to this day I don’t remember who?—?that our problem was that we simply weren’t investing in enough resources to learn quickly. The solution was simple. Hire more people.

That was the wrong advice. We didn’t need more people, we needed the right people. Doing the right things. Increasing burn took a company that needed, among other things, more time to figure things out, and it gave it less.

That experience, starting with a simple directive?—?and the cascading folly of errors that proceeded from it (some of which, entirely of my own doing) has shaped much of what I believe about managing cash flow at an early stage. It’s the same belief I’ve applied to other startups I’ve worked with and that we apply every day here at Ahalogy.

Seed / Pre-Fit

Before initial traction, your number one job as a founder is to learn as much as possible, as quickly as possible, in search of product / market fit. The trouble is, founders often conflate speed with spend?—?i.e. “we’ve raised money, we have to go fast, ergo, we have to ramp and scale and burn.” Bullshit. You’re not ready for that.

Learning quickly means talking to customers, running experiments, deploying code, and talking to more customers. It’s understanding the nuances of the pain points you’re trying to solve and the specific white space you’re going to attack. It doesn’t mean spend quickly. In fact, sometimes spending and learning are negatively correlated, not positively.

The road to initial traction, especially in SaaS, is 24 months. Maybe longer. Almost definitely not shorter. And until you’re there, your job is to stay in the game. A higher burn makes it harder to stay flexible and harder to stay in the game.

So before initial traction, the answer to “how much should I burn” is simple. As little as f*cking possible. Period. If you don’t absolutely require it to stay alive and learn more about your customer, cut it.

And I hear the objections now. “We could grow much faster if we had a bigger product team.” “We’ve got a great product, we just need more sellers in market.” “I can’t focus on the strategy if I’m wearing every other hat in the company, too.”

While these are all perfectly valid considerations post initial scale, they’re just excuses before then. The fact is, there’s no evidence to suggest spending more leads to growing faster. In the early days, resource constraints have a beautiful way of crystallizing your priorities. Small teams are more nimble as you’re exploring and iterating, and reaching customers will never be cheaper. Just read these stories from founders on early customer acquisition, and you’ll hear the same thing?—?listen, learn, focus on product, and find free/cheap ways to acquire customers.

Pre-fit, keep your team small, focus on learning, and give yourself two years to get to initial traction. And if your plan requires more capital in two years to stay alive, then you’re default dead and don’t have a business yet.

Initial Traction / Scale

Once you’ve reached initial traction?—?$1MM annually or more?—?things start to change. You’re starting to learn what a customer is worth, and you’ve begun identifying repeatable channels to go find them. You’re gaining a sense for payback period and CAC/LTV. You’ve validated that the market is picking up what you’re putting down, and it’s time to start investing in a sales & marketing flywheel.

Now that you’re working with a slightly different brand of calculus, how quickly should you invest?

The best framework for answering this comes from Tom Tunguz. His advice is to think about burn in two buckets: base burn and growth burn.

Base burn is the total fixed cost to operate the business and keep the lights on: salaries, rent, legal, infrastructure, etc.

Growth burn, then, is the cost spent to acquire new customers. Tom restricts his definition to sales & marketing costs, but personally, I’d expand it to include all investments in growth?—?sales & marketing, new product development, biz dev efforts, etc.

When viewing your company through this lens, your goal?—?at a minimum?—?should be to become “base burn-profitable” as soon as possible. For 90%+ of companies, the goal should be to become overall profitable, too, but at least base burn-profitability provides the business the optionality to stand on its own two feet and operate indefinitely, even if in a pinch it needed to cut its investment in growth.

How you manage your growth burn, then, is situational, but if you decide to drive a net loss through a measured investment in growth burn, here are a few things that should guide your decision of ‘how much’:

• Availability of capital?—?If you’re growing 200%+ per year and have a deep bench of highly supportive investors, you can afford to drive growth burn more aggressively than a founder who does not.
• Time to raise?—?Depending on your stage of capital, it can take a few weeks or many, many months to raise, and you’ll want to make certain you’ve left yourself enough runway to do it. Safely plan for 4–6 months before new cash is in the bank.
• ROI?—?The value you create must be at least three times the cash burned in order for it to meet the minimum return threshold for a VC, otherwise you’re wasting their money. If your CAC is higher or payback is longer than it needs to be, dial back the spending until you figure those things out.
• Beware diminishing marginal returns?—?the goal for any startup is to build a repeatable revenue stream where a dollar invested returns three or more dollars in value every. single. time. But that consistent return has a ceiling. Sales territories saturate, incremental leads become more expensive, and bloated business units lose productivity and drain cash. If you start to hit diminishing marginal returns, slow down.

There are no simple answers for burn, and certainly no shortage of opinions that will contradict?—?many directly with mine. But don’t lose sight of the fact that ‘startups’ and ‘businesses’ aren’t mutually exclusive?—?they’re the same thing. Businesses have to make money to survive. So does your startup. I’m not suggesting measured investments in growth don’t ever make sense. Of course they do?—?it’s a category defining trait of a scaling, growth-stage startup.

What I am saying is that if your business is among the 95%+ of startups that are not yet scaling, growth-stage ventures, you’re probably burning money you shouldn’t be. And it might kill you. It certainly killed us.

This article was originally posted at medium.com/ryankwatson. Want to read more stuff like this? Cool. You can find me here.

Ryan Watson is the SVP of Finance & Operations at Ahalogy, a leading performance content marketing solution, and co-founder of Upsourced Accounting, a tech-enabled accounting firm for startups and small businesses.