There was a very curious thing in Zoom’s financials leading up to its IPO that I am surprised no one commented on, at least that I saw. But as a founder, it jumped out at me.
In 2017, Zoom’s cash burn was exactly equal to its Gross Proft. In other words, it burned exactly $0. It didn’t make a profit that year (although it does now), but nor did it even lose a nickel:
Coincidence you say?
Hardly. Not from one of the greatest SaaS CEOs and founders of all times.
No, I am pretty darn sure I know what Eric Yuan did. He had a very precise burn rate budget. He told his team exactly how much they could spend — as a team. How many of those billboards, bus wraps, YouTube ads, etc. that you see everywhere. That they could spend even penny they brought in that year in gross profit. But — not a penny more.
And they hit it. You can see above, they also came pretty darn close the following 2 years as well.
I’m shocked how many start-ups fail to do this. And by not doing it, they get in so much trouble. Sales gets a little over budget. Marketing spends just a bit more than plan. Engineering buys a few unbudgeted tools. Each alone doesn’t wreck you. But altogether, added up over months, you end up with a burn rate significantly higher than anyone planned. Or even felt. The Kind bars don’t get you into burn rate trouble. It’s everyone overspending, just a bit. Month after month. Without any basic controls, or even, joint visibility into what their burn goals are.
So I have a simple suggestion whenever you raise a financing round of any size. It is so simple and effective, yet no one does it:
- First, Build a Burn Plan. Take your burn rate for the last 4 months, and average it. Then roll it forward and see how many months it will last. Then see how much increasing the burn by X% decreases your runway. Solve for the amount of burn per month equal to the runway you think you need. And ideally, add a buffer of say 3-4 months of runway.
- Then, Set a Burn Rate Budget for Each and Every Month With The Team — And Review It Weekly. If the burn budget is say $200k for this month, make sure everyone knows how you are tracking weekly. This will produce magic. Instead of everyone naturally acting a bit selfish to protect their asks — they’ll act like a team. They’ll automatically prioritize when and how to make hires, expenses, etc. to fit the budget for each month. Sales will know that one hire can wait. Marketing will put off a campaign that probably won’t perform as well at least for a month or two. Engineering will wait until next quarter to make that hire, if they don’t really need her right now. Etc. etc.
- As Revenue Goes Up, You Can Burn More Each Month. At least a little. So relief does come. The burn rate budget just forces everyone on the team, as a team, to sequence exactly when during the year various expenses will be incurred.
Almost every founder I know that doesn’t do this ends up out of budget. Or in some cases, too conservative and too far under budget.
No, what you need is something simple. An allowance for your team. That this is how much they can spend this month.
It will reduce your stress. Increase your efficiency. Enhance focus. Not decrease productivity.
And maybe, just maybe, make you a little bit more like Zoom.
(note: an updated SaaStr Classic post)
Yep – we raised $119m for @duosec, but only spent $40m to get to $200m ARR (with the triple-triple double-double, and then some). Checks out! 👍
— Dug Song (@dugsong) March 31, 2021