Startups are adjusting “burn,” or the net amount of spending in a given month, as they stare down the COVID-19 crisis, and they may want to reflect on what the marginal spending they are now cutting was achieving. A high-growth, strong LTV:CAC, fast payback startup can mask lots of inefficient spend. This crisis is exposing some of that existing bloat as companies are adjusting burn in real-time.
“Wait, we didn’t need this spending to begin with?”
The current crisis is forcing companies to make hard trade-offs between growth and extending their cash runways. Functions and roles that are less critical in generating short-to-medium term revenue come under scrutiny first when cash is tight. This begs the question: take away the current crisis, and should they have been spending that money to begin with?
A high-growth startup is always in a race against burn. Certain milestones, whether it be users, or revenue, or deals, need to be hit before the money runs out. Startups can spend more and have less time to do it or spend less and have more time to do it. Sometimes they can’t spend money as fast as they’d like to due to hiring constraints, technical constraints, or something else.
The pandemic has drastically changed forecasts for businesses in 2020. All companies will have a new 2020 forecast. But, if there is no *incremental* forecasted loss in any relevant timeframe tied to layoff/furlough scenarios, they may want to consider how much revenue generation or maintenance those functions had in the first place — and how fast they need to be re-hired or backfilled as we come out of the crisis.
At some level of layoff – for example, your core product and/or sales and/or success team – the impact to revenue is real and abrupt in the short-term. Of course, startups trying to gain an advantage on well-staffed incumbents are hiring for the future and spending substantial capital on R&D. But it may be useful to model the revenue loss for each level of burn reduction projected out over a reasonable period of time (say 18–24 months). Up to some level of burn reduction (involving marginal roles), there is no change (see section above). Beyond that, we start to see changes further out in time, and as we increase the modeled slashing, the sooner we see the effect. For example, cutting marketing spend marginally likely won’t affect short-term deals much, but a zero budget would.
This crisis has forced scrutiny on some spend that likely was not ROI positive in the short-to-medium term with uncertain long-term benefits. Hyper-growth startups tend to promote quickly and managers want to fill out their teams and functional areas; people like to grow in their roles as companies are growing. But this may come at a cost, which was largely hidden before but is exposed now.
“Minimum viable burn”
The natural extension of the revenue-runway-time test is to test for “minimum viable burn”. Scrutiny on the marginal dollar has never in recent history been higher: it’s being pitted against the basic survival of a business. Many businesses are figuring out the minimum amount of burn to keep the lights on and achieve the maximum amount of runway as they sort through the uncertainty of the coming months and years. It could be the bridge to new sales bookings coming back to life or a financing event, while the alternative is shutdown.
So, what is the minimum viable burn for your startup? One would hope to never (again) need this planning tool, but it can help founders as they plan for trade-offs between milestones, burn, and runway. It’s always good to know your floor burn to “keep the lights on,” and plans that are never enacted can still be good teachers.
Periods of suppressed spending (e.g. times with no sales and marketing spend) can still provide opportunities. It may be a good time to double down on the product roadmap. Without the distraction of requests from sales or marketing, the development team could take leaps forward in features, stability, and scalability. The bugs that never get attention now could, thus decreasing technical debt in the future when sales and marketing “spigots” turn back on.
Building for the long-term
The above exercises are imprecise, oversimplified, and do not account for many other variables. Many other factors can impact planning, like the ability to re-hire talent, competitive positioning from long-term R&D investments, the cultural impact of layoffs, and more. But remember that *not* hiring someone is not the same thing as hiring and then laying someone off. And the potential R&D benefit 3 years from now may not be as important as hitting milestones necessary for additional growth capital next month.
It’s fair to say this thinking might incentivize short-termism, typically a criticism of public markets, and avoiding it being one of the advantages of being private. Short-term cuts to SDR prospecting or marketing spend can hurt growth many quarters in the future. There is always a balance between the future and the now. But the scales tilt toward now in times of uncertainty and stress.
If this thinking can help produce more *active* trade-offs and choices rather than passive/copycat behavior (e.g. “I raised $20M, I’m supposed to be hiring a lot”) then it has served its purpose.
As existing startups come out of this crisis and new companies are formed in it, it may be worthwhile to pause and consider what the crisis revealed and taught us about existing burn bloat. COVID-19 might create a new paradigm around the marginal dollar and trade-offs among milestones, time, and runway. At least in the short-to-medium term.