The One “Small” Mistake That Almost Kills Start-Ups From $10k to $100k in MRR

“As a VC, have you ever seen a promising startup destroyed by a small mistake?”  I haven’t.

However, multiple times I’ve seen them almost destroyed by a “simple” mistake — not predicting the burn rate, and cash out-flows, properly.

In the very early days, pre-revenue, you pretty much get the burn rate right. If there are 2 of you at WeWork and zero customers, you know what you burn each month 😉

But once a start-up raises some money and starts to hire, even at just $20k to $40k in MRR, oftentimes without any background in cash management, they mis-predict.

Put differently, their gut on cash burn is a bit off. They haven’t done it before. And just enough off to have dangerous consequences:

  • For example, if you raise a $1m seed round and hire 10 folks to scale and your burn rate goes up to $50k a month net of revenues … then you have 20 months of runway. That’s not 24+ months, but it’s probably OK.
  • But if those same 10 hires, net of revenue, burn $100k a month … you are out of money way, way faster. In 10 months ($1M/$100k). And really less, because it starts to get stressful those last months when the Low Fuel light starts to go on. So more like 7 months.

The difference between 7 months and 20 months of runway is profound. And it’s hard to intuit this, exactly what those 10 hires will really cost, exactly how collections will go, exactly how much revenue will scale.

So time and time again, I’ve seen the burn rate creep up on founders even in the early-ish days in ways they didn’t expect, or more importantly, simply didn’t intuit properly.

In the end, they find a way. But it would have been a lot better if they simply could have tracked and predicted their burn rate better. And even just really understood it.

View original question on quora

Published on September 28, 2018

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