In the startup world, burn rate is broadly described as the monthly rate at which a new company spends its available capital. Burn rate is largely used to estimate your runway, which is the number of months your startup can survive according to it’s money reserves. Roughly, this is the calculation:
cash in the bank / (monthly burn – revenue) = runway left
Let’s use HBO’s Silicon Valley as an example. Russ Hanneman just invested $5,000,000 in your company, Pied Piper, at an undisclosed valuation. If you are spending $100,000 per month (on salaries, office space, growth, servers) and making $0 revenue, this means you’ve got 50 months of runway or just a little bit over 4 years.
Recently, the most prominent entrepreneurs and VCs, like Sam Altman, Bill Gurley or Fred Wilson, have expressed concerns that burn rates are indeed sky high all over the startup sector.
As a company, we agree with those allegations. In fact, staying in Penang and hiring a remote team was a conscious decision to avoid Silicon Valley’s ridiculously high burn rates.
With that said, let’s go through 7 different tactics to maximize resources.
Rush to ramen profitability
The single best way of avoiding burn and extending your runway infinitely is to earn enough revenue that makes you profitable. You don’t need thousands of customers and $100,000 in monthly recurring revenue, but if you keep your team small and efficient, $10,000 can go a long way.
Paul Graham knew this and encouraged the first Y Combinator startups to get enough money to pay rent and buy ramen – hence, the term ramen profitability.
Increase equity for great employees
Sam Altman wrote an essay called Startup Advice in which he famously advises to ‘keep salaries low and equity high’. For tech startups, employee salaries are, by far, the biggest expense. This is because these people are the ones writing code and getting customers everyday. If at first, you pay employees with a balanced combination of money and equity, you’ll be able to extend your runway by at least 6 months.
In addition to keeping your burn rate low, this will help you build a highly talented team of people who believe in your startup. By definition, it will exclude people who don’t believe in what you do because if they did, they would be trying to maximize equity and not their paycheck.
Having a distributed team might be the single best call. There are plenty of successful examples like Buffer, Automattic and of course, Piktochart, that prove that it’s not only possible, but beneficial.
First, your pool of applicants comes from all around the globe. This means you can get the same talent as in San Francisco, for a fraction of the cost. Today, you don’t need to be based in New York or the Bay Area to succeed.
Second, as there is no office, there is no office expense. That will save you at least $3,000 per month, which you can invest towards hiring an extra developer or that growth guy you really need. Besides, you’ll avoid trapping yourself into a multi-year lease.
Relocate to a secondary city
As we mentioned previously, there’s no need to be based in San Francisco or New York City anymore. Due to the astronomical costs of living, plus a high density of competitors fighting for the same pool of candidates, hiring people gets increasingly expensive.
Hubspot is based in Boston, 37 Signals in Chicago but with a remote team, and Zappos in Las Vegas. That’s the main reason why Piktochart is based in Penang, Malaysia. Although we’ve had multiple opportunities to relocate to the Bay Area, there’s no real need to do it.
Swap paid ads for content marketing
At the beginning, pay-per-click ads (like Facebook Ads or Adwords) are a tempting way to get some leads on the front door. However, unless you have a big dedicated marketing budget (which you shouldn’t), avoid paid ads.
Instead, start slowly building a content strategy yourself. The great thing about content is that it positions you as an expert in the field, it’s free and it compounds (meaning you are constantly building on top of your previous efforts). Groove is a perfect example. Alex, the CEO, decided to write about their journey from $0 to $100,000 in MRR while it was happening. In the first month, they got 1,000 new subscribers and now they are well over their $100k mark.
Hold on to big expenses
Do you really need that .com domain, or the .io extension is fine for now? Do we need that cool office space and the Aeron chairs? Is amazing outsource designer essential to survive?
When starting up, the temptation to ‘play startup’ and go do what other funded startups are doing is strong. When you are trying to bootstrap or maximize your runway, don’t spend a dime unless it’s essential to stay alive. This usually means food, rent, a gym pass and infrequent VC/customer dinners.
Don’t hire too fast
Hiring without really considering the candidate can kill you in two completely different ways. First, as Jason Lemkin says: only hire to cover a need. Don’t try to fill a slot because it will cost you money you don’t really have. Instead, you should delay that hire until it’s absolutely essential. You’d be surprised how many startups aren’t 100% sure why they are hiring. Jason Fried, from 37 Signals, has an even more extreme approach: don’t hire. Look for another way, and if there isn’t then consider a hire.
Second, if the hire underperforms or it’s the wrong culture fit, you’ll need to fire him. This will cost you money (as you will need to start searching for new candidates), but keeping him is even more dangerous. It has been a very painful lesson for us at Piktochart so we’ve learned to dedicate much more time to the “filtering” phase of candidates and add extra “cultural” interviews to make sure it’s a good fit.
Final advice: hire slow and smart, and only hire to cover a real need.
Don’t go SaaS crazy
Everyone loves subscribing to tons of services. After all, you can do some really interesting and cool stuff with some of them. The question is: do you really need that $200/month KISSmetrics subscription? I would argue that you don’t. In fact, I’d say that you could keep your startup alive and have a pretty sophisticated growth stack for less than $9/month.
- Segment, to handle all your integrations (free)
- Mixpanel & Google Analytics, for analytics (free up to 200,000 events/month)
- Optimizely, for split testing (free)
- Active Campaign, for email marketing, automation, optin forms ($9/month)
If you throw Google Apps and hosting in there, you’d still be spending less than $50/month on web services. With that said, don’t go the other direction and start building every tool in-house. That’s even more dangerous.
Thanks for reading this far! As a founder or entrepreneur, do you have any personal tips to minimize your monthly burn rate and maximize your runway? Please, share it in the comments!