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Start-up cash burn rates for a software / web company
Well, time to give a thought as to how much is a reasonable monthly burn. The more money given/raised, the greater might be the temptation to burn more. Well, not anymore. That comment is from the TMT boom of Y2k. When some CEOs thought that you raise cash, you burn it, and the VC puts a hand in the pocket to give you more.
As we look at the lean start-ups of today, the burn can be far less. A well run start-up should burn less and be far more focused. That’s down to how good the business idea is, how well it’s executed, and how tuned the management team is. Software and tech start-ups can be run as one man bands at first. Indeed Richard Farley commented that one if his investees requested £200k, and settled on £15k with milestones attached. When it comes to supply (investor cash or bank finance / both harder to come by) and demand there’s always a deal to be done.
Thinking in general terms start-up at stage 1, call it building a product, should be burning no more than £30k a month. This should be enough to hire a flexible dev team of around 4 engineers / ‘softies’ and some freelance help with non-development activities. These early stage employees/ agents should be incentivised with options. Indeed offering more options can cut the burn further. Making sure you have a commercially focused financial director can make a great contribution to helping focus burn with activity and visibility.
Stage 2 building usage will be post release, when the product is available and the challenges are now relating to scale and refining releases. This will involve incorporating functionality and taking on board some customer suggestions. Care here mind – since the business needs to be weary of being agile whilst keeping on track. The monthly burn may increase to around £70k as additional employees are hired, including marketing, product management and support. Additional dev resources may have been hired speed up the development cycles.
Stage 3 will effectively be building the business. The product should be robust by now, a marketing strategy in place, and a defined development and product road map. Building the business will involve more scale; more processes, more throughput and a need to improve accountability and visibility of financial and operational activity. The burn could easily reach £150k, and beyond. However, the business should ensure it is increasingly accountable for the resources and cash spent, with a good understand of its customers and business model.
As the business scales and has greater visibility of its revenues and product pipeline there should be a greater awareness of the present and future value created by burn and investment. Investors will now be looking forward to some traction, greater revenues and investor return/ payback – either by increased valuation or better still some positive cash inflow.
Throughout the three stages it is important to ensure that the team is focused and all hands are focused and understand the importance of being accountable and understanding of the need to give the greatest bang for the buck. Again, the input of a commercially focused FD will help ensure that quality information is prepared and suitable KPIs are available on a regular basis. |
Startups and cash burn rates
