In every business, Cash Flow is King – this is just as important when you’ve got loads of “money to burn” as when you have a very limited budget. Besides the obvious risk of running out of money, high cash burn rates are a bad idea because they mean poor strategic agility. Poor what now?
If you spend all your cash on fancy frills, you’re probably not growing the business and scaling. If you burn too much money hiring, you’re not really leading. If you kill all your cash, you can’t adapt quickly if the market changes.
Silicon Valley is really starting to worry about it, as expressed recently by the likes of Marc Andreessen (Netscape), respected venture capitalist Bill Gurley, and Fred Wilson (Union Square Ventures).
Raising a lot of money gives the illusion that a startup has made it: salaries can be high, offices can be glamorous, and it can make employees feel a false sense of relief, like all its hard work is done.
Here are some things to watch out for:
Hiring people is easy. Laying them off is devastating. The more you hire, the more the business starts to bloat, burns cash, and begins to run poorly. What was once a singular vision of the Founder is now beginning to diffuse, in the hands of more and more people. This is actually a fairly natural progression which is to be expected – and can be mitigated through proper brand continuity and standards, in place of the Founder holding everyone’s hand. Hiring binges may signal growth but can also demonstrate lack of control. Make sure the overall vision of the company flows through management, operations, and into each and every individual who comes aboard.
Too much cash and too many people usually leads to communication breakdowns, as the business loses its clarity of purpose. A big shiny office with lots of new staff can give you a (fake) “we’ve made it!” feeling and distract from the need to actually deliver results. This can exponentially slow everything down as you lose sales to smaller, more agile competitors and become obsessed with differentiation – and in the process, lose your edge. A lack of balance between decisive edge and communication makes your startup a bad place to work, fragmenting your culture and your offering. It becomes too complex and unwieldy to easily change course.
At some point you have to build a real business, generate real profits, sustain the company without the largess of investor’s capital, and start producing value the old fashioned way.
There are no exceptions to the above but if you’re reading this, you’ll probably be OK – here are some things you can do now:
CUT THE FRILLS. Stay Lean and don’t worry about things like office design and expensive coffee machines. You can have the Herman Miller chairs when you’re cashflow-positive and pulling in decent monthly sales – until then, grab your coffee down the street and get to work.
HIRE WOLVES, NOT SHEEP. Spend your money on top hires who bring immediate appreciable value to the business and who can move the needle for you. If a new hire isn’t already making a dent the day they land, their value is questionable.
INVEST IN MARKETING. What to know what’s on every analyst’s mind? Brand Or Die. Differentiating on the basis of brand can be the extra you need to overcome competitive pressure and analysts are telling tech companies to stop worrying about whose widget works better and start brand building. Figure out who you are, what you do and why you do it.
Sterling SmithSterling has extensive experience in important sounding stuff and something about his opinions and blablabla are you seriously reading this right now?