Internet startups have been getting cheaper to build for 10 years. So why is it more important than ever not to run out of cash?
We built MerchantCircle into one of the 100 most trafficked U.S. sites and I honestly never remember signing a purchase order for more than $10,000. But that doesn’t mean we didn’t fear the ever-present prospect of running out of money.
What kept us viable was our goal of building a small, tight and flexible company. We posted a chart in every board meeting because revenue could be volatile, asking what would happen if 50% of it went away. I always had an idea of what my minimally viable team (MVT) was – just how small we could whittle down our operations. When the largest Google algorithm change hit, we juggled to protect our cash flow and innovate through it, just as we had with every hiccup.
I remember sitting down as a team during the crisis of 2008 and concluding we were fortunate we didn’t need to cut and that we had a path to cash flow breakeven. I have no doubt that is what led to our success and the fact that we never had a layoff and grew cash right up to the company’s sale. Raising more money at the time would have been difficult and costly, as it may be again soon.
This kind of diligence isn’t always the case.
Consider SimpleGeo’s sale to Urban Airship for a reported $3 million after raising $8.14 million last year, or BuyWithMe being picked up for what some news reports say is $5 million after raising $21.5 million in 2010. Top teams like SimpleGeo’s might have persevered with more time. But running out of cash comes with grave consequences. You no longer can wait around until the timing is right
I entered the startup world by getting a similar knock on the head. During the last boom, I was investing in and partnering with startups for EDS, which a few years earlier had bought my employer, A.T. Kearney. In the winter of 2000, I sat with Marc Friend, then at U.S. Venture Partners, giving him an update on Casbah, a company I had supported along with some very big name individuals, including former Apple CFO Joseph Graziano. I had just bridged the company when a term sheet was pulled – and I quickly figured out the difference between a bridge and a pier. No new deal was going to come together. The company was out of cash. I then spent a few months as interim CEO learning about asset sales and liquidators.
Marc’s advice confirmed the significance of the situation. “No cash means no maneuvering room; never ever run out of cash,” he said in so many words.
This seems pretty obvious. But I am often amazed at the excuses people come up with to explain their failure. Here are a few:
- We had bad timing. With enough cash, you can persist through the bad timing and be there when it is good timing.
- We had the wrong model. If you spend small amounts trying different models and evaluate the data, you can adjust before you have committed all of your cash and find the right model.
- This was an expensive startup to build and we did not raise enough. If you find cheap ways to experiment until you find the right unit economics, enough cash will be there.
The reasons most companies fail are two fold: a lack of persistence and a lack of cash. Persistence is something found deep inside your founding team. It is there or not. The lack of cash is something you can control.
A few lessons on cash:
- Your personal burn rate is probably the most important indicator of whether you will run out of cash. It is tough to be persistent when you are living a life that requires more money than you can earn on the side working a day a week.
- Spending $2 million on stuff is a path to running out. This used to be Oracle licenses and EMC hardware, but it can be just about anything. You don’t want to find yourself writing “return to sender” on Sun boxes, as I did in 2000.
- Don’t invest in people you can’t afford to keep around. In 1994 with the defense shrink underway, I learned one of those lessons I will never forget as a 25-year-old consultant advising the Lockheed Missiles and Space Company. COO Dick Scanlon looked me dead in the face and said, “costs walk on two feet.” Your team is your primary asset and most of your expenses.
- Senior teams burn cash not just because they are expensive, but because they have a natural tendency to hire people.
- Rent less space than you need. The greatest thing about a small space is that it forces everyone to really think hard about hiring. Besides, building people always get paid, like the landlord who collected 50% of a 2000 startup asset sale.
Here are five tips for when money gets tight
- Have trusted relationships with your bankers, lawyers, and vendors so you can extend payment terms.
- Never touch benefits, office perks, or salaries. If you have to cut you are better off cutting down to your MVT and raising salaries a bit.
- Cut all outside contractors, but never cut public relations or customer communications. This is an asset that takes forever to rebuild.
- Outside of one or two key members, cut from the top down. Junior people will grow quickly when the shade above them is removed.
- Cut twice as deep and two times as fast. Then start hiring the next month.
Sharon Wienbar, a managing director at Scale Venture Partners, will give you a pretty straight answer if you ask her about the job of a startup CEO.
“Make sure the company never runs out of cash; it is the fuel of a startup,” she told the top manager of a company we were both involved in.
I can attest. She knows what she is talking about.
(Ben T. Smith IV is a serial entrepreneur and investor and the co-founder of MerchantCircle.com and Spoke.com. He is available on Twitter @bentsmithfour.)
via Ben Smith: Building Startups Is Cheap But Never Run Out of Cash | peHUB.
You must be logged in to post a comment.