Your personal finances can kill your startup

“Are you independently wealthy?”?

This was in 2018 - I had just started working on Tint a few weeks prior and was chatting with a seasoned entrepreneur. I was taken aback. How is that an appropriate thing to ask someone??

I only discovered later, the question was exactly on point. The personal financial status of founders has a direct influence on the shaping and survival of their startups, significantly impacting the capital required to establish and sustain the company during its early days.

This lesson was hard won. Here are the key things I've learned from my years as a founder navigating the intersection of personal finance and startup success.

Personal runway equals startup runway?

Early-stage founders underestimate the confluence of their personal financial runway and that of the company. A startup's demise is almost certain if its founders get distracted or have to stop due to personal financial constraints.

The reality is that surviving on a “ramen salary” isn't viable for most founders. According to a Harvard Business Review study, the average age of startup founders is 42 and there are many reasons why that is. One of those is that by that time, you’re more likely to have a financial cushion to fall back on. I learned this lesson the hard way. Before Tint, I cofounded a startup during my second year at Harvard Business School. It was a challenging period where I didn't draw a salary for nearly 12 months, eventually depleting my personal savings, maxing out my credit cards, and accumulating high-interest debt. The startup ultimately failed due to insurmountable business model issues. The experience underscored the intrinsic relationship between personal and company financial runways.

I didn’t make that mistake again when I started Tint. After spending four years as an early employee at Turo, I managed to pay off my debts, built a safety net of savings, and accumulated valuable stock options. These decisions gave me the flexibility to reduce my salary during the challenging times at Tint, because challenging times inevitably come. Because my personal finances were healthy, I could extend the company's runway without jeopardizing my personal financial stability.

I also made personal choices – I moved from the high cost of living in the Bay Area to Las Vegas to significantly reduce my personal financial burn and improve our quality of life.

A founders' ability to efficiently manage their personal finances often translates into a competitive advantage for their startups. High personal expenditures necessitate higher salaries, reducing the overall chance of success for their venture. A comparison between two identical, remote-first, startups with founders having different personal expenses, illustrates this. If Startup 1’s founders reside in a small city spending $50k/year, while Startup 2’s founders live in expensive cities like San Francisco or New York and spend $150k/year, Startup 2 will inevitably need more funds. This will increase their risk, dilute their ownership, and produce little additional value for the startup.

Strategies to maximize personal runway

Here are a few strategies to optimize your personal runway:

Evaluate and aggressively reduce your living costs: Classify your monthly expenses in descending order. Determine which costs are fixed and where potential savings can be made. Discuss these options with your family, if applicable, to understand the overall implications of cost-cutting measures. The main drivers of your cost are likely to be related to where you live (e.g., housing, school, commute, etc), making relocating to a more affordable city a potentially impactful decision. Remote work enables massive cost savings if you can move, and websites like Numbeo help you estimate the cost of living of different places.

Minimize travel and entertainment costs: Early-stage founders often find limited time for vacations and social activities, allowing for natural cost reductions in these areas.

Prepare for short-term sacrifices: Cost-cutting might necessitate making lifestyle changes that may be challenging, at least initially. Ensuring your startup's success might mean giving up certain comforts, be it the status of a high-power job or the perks of an upscale lifestyle, and managing the mental toll of this change. The key is to remain focused on the bigger picture – the success of your startup.

Save at least one year’s salary: Startup founders should ideally have sufficient savings to cover at least one year's salary to prevent personal financial crises from affecting their business. Founders who have families should look at the household income and ensure that the family has enough income and savings to allow the founder not to get a salary for at least 1 year. These savings are especially important in households like mine where the two of us are founders and our short-term income is uncertain.?

Balancing Your Personal Runway

Startup founders need to manage their personal finances prudently, similar to how they'd handle their startup's finances, to mitigate any additional risk in an already high-stakes game.

The rise of remote work offers a unique advantage by providing flexibility and opportunities for reducing costs, enabling founders to uphold their standard of living while minimizing expenditure. This becomes even more important in today's challenging fundraising climate.

Your startup's success hinges on many factors, one of them being effective personal financial management. Founders who successfully navigate this aspect significantly increase their chances of succeeding.

You wouldn't use your funding to pay for five-star hotels and first-class plane tickets. So why would you use it to pay a high salary required to fund living in a “luxury” city?