Understanding and navigating burn rate: a startup primer – 6: understanding resources and the strings attached
This is my sixth installment on a crucially important area that most startup founders do not explicitly, strategically plan for and certainly not first time entrepreneurs – resource availability and burn rate: the rate at which available liquid resources are expended (see Startups and Early Stage Businesses, postings 67-71.) So far I have been focusing in this series on building within the limits of the resources you have available, and making effective use of them. As already noted, the principle reason why startups fail is that they run out of money before they can break even and start to generate a profit. So this is important to get right. I am going to turn in this posting to look at those resources themselves. And here, I will be dividing up the available resource pool according to a set of properties and considerations:
• Source – is this founder money or is it coming in from an outside investor?
• Time frame – how readily and rapidly is this funding going to be available, and is its availability contingent on certain goals or benchmarks being reached, inside or outside of this venture itself?
• Strings attached – does this funding come in and become available contingent on the founders agreeing to specific operational and/or strategic decisions and if so what are they and how would they impact on the founders’ basic core plans and goals?
• I will add as a final bullet point here the observation that not only do you have the potential for insider/founder goals and priorities and outside funder due diligence driven goals and priorities – you often also have differences in goals and priorities within the founding team and this impacts on both resource base availability and burn rate considerations too.
Last year and at the beginning of this I posted a 19 part series, Online Store, Online Market Space (see Startups and Early Stage Businesses, postings 20-33 and scattered following.) I start this posting by recommending that you read a specific installment from that: Part 18: exit strategies and long term planning. I wrote in that posting of funding your venture on your own and from within your founder team and I at least touched on some of the issues faced when seeking outside backing in the form of angel and venture capital investors. I pick up on this same set of basic issues here, this time looking at them strictly in terms of the liquid resources available – and the impact of the contexts and decisions that funds bring with them.
It is a primary responsibility of the founders of a startup to plan how they are going to build, and within the limits of the resources they have available. This means deciding what to do and when they can best afford to do it. This means taking calculated risks and knowing as much as possible what the potential risks and benefits are going into them. This means thinking through their alternatives and understanding how outside funding and outside investors are going to have their own agendas and their own and perhaps very different risk/benefits analyses and their own goals. And it means knowing that every dollar available will have strings of some sort attached, and even if those are dollars from your own pocket and your own personal investments. There, you have to weigh impact that investing in your business will have on your family and on the rest of your life.
Take calculated risks that you have thought through and understand. That is a big part of building a startup and a willingness to do this is a big part of what sets entrepreneurs apart. But as I said in Part 1 of this series, do this with an acute awareness of your inner chief financial officer and look at the details on the books and not just to potential top and bottom lines.
I am going to finish this series, at least for now with a seventh installment in which I will delve into non-liquid assets and resources and how they connect into this. Sweat equity comes immediately to mind here and will be discussed in some detail as to how it fits in. Meanwhile, you can find this and related postings and series at Startups and Early Stage Businesses, and also see Business Strategy and Operations.