Author: Adam Liposky
Date: July 26th, 2019
Maintaining a healthy burn rate is one of the biggest every-day challenges for an early-stage company.
Burn rate is perplexing because it can simultaneously hurt the bottom line while also indicate driving growth. In other words, correlation is not necessarily causation. That being said, when your burn rate is growing faster than your business, it is hard to know where to turn without spinning your wheels and questioning every aspect of the company in the process. Luckily for you and your business, there are some proven tactics to keep the burn rate manageable.
What is burn rate?
Burn rate – or more simply referred to as ‘burn’ – is a business performance metric that reveals the rate at which a company is losing cash. Often measured on a monthly basis, burn helps founders keep track of the bottom-line and, in general terms, understand how sustainable the business model is over time.
Measuring burn rate is common for startups because early-stage companies without an established customer base often dip into deficit to identify customers and build a repeatable customer acquisition process. Most startups wind up highly undercapitalized in pursuit of product market fit, creating a lopsided cost-structure that increases the risk of failure and/or massive success.
In a situation where burn rate is increasing faster than revenue, company leaders need to have a precise plan of action to prevent a downward spiral. While every solution is problem specific, here are three tried-and-tested directions to take your startup when the burn rate is growing:
A Customer Pivot
If it is costing you too much to acquire and retain customers, then a customer pivot might be in order. A customer pivot means repositioning your product or service to target a different set of customers than before. In a B2B setting, it may involve a move up market, shifting from servicing mid-tier companies to enterprise-companies, for example, which generally have a higher lifetime value.
Of course these decisions cannot be taken lightly, as pivoting your target customer will cause a related change in cost-structure. The amount it costs to get the new product to market, execute on a sales strategy, and deliver the new product or service will increase or decrease depending on the pivot. It is important to keep these accompanying costs in mind when strategizing on the next move.
While pivoting can be challenging, it is also essential to success. Remember: customer pivoting is commonplace for startups. In almost every case, there will be multiple pivots before a successful market fit is found. This is why spending too much time ‘perfecting’ a product before finding a market fit is often a costly mistake – one that contributes to an unhealthy burn rate. The challenge is designing a cost structure that is agile enough to pivot without carrying excess weight along with it, and robust enough to drive revenue growth without substantial marketing or sales spend.
A Market Pivot
A market pivot is one of the most substantial shifts a startup can make. Unlike a customer pivot, which usually involves a shift in customer targeting within the same market or industry, a market pivot pulls the company from an existing market and re-positions it as a player in a new market. This type of transition is needed when it becomes clear that market demand does not exist, and a new market is identified as a better fit.
Although a drastic shift from the perspective of sales and marketing, from a software perspective the transition is not always substantial; in some cases a company is able to leverage the same core technology to create products or solutions with features for a different market without radical increases in cost.
For example, a financial technology solutions provider might decide that their initial plan to enter the retail banking sector is no longer viable because the cost of acquiring customers is too high and demand is low.
The insurance market, however, might show plenty of opportunity, indicating the value of a market pivot with a minor change in product development costs. The flexible organizational nature of a startup makes a market pivot possible in a short amount of time, and, if proper research is undertaken, can resolve the nagging issue of increasing burn rate by repositioning the company in a market with higher margins and better long-term growth prospects.
Another potential cause of unsustainably high burn rate might be organizational inefficiencies. Often, an imbalance in company operating costs is the core issue weighing on the bottom line. Common costs here are employee salaries, office rent, project management inefficiencies, IT costs (including project management software, research tools, cloud storage solutions, and the lack of automated processes). Efficiencies can be found in all these areas that can substantially cut monthly overhead, bringing the company closer to profitability without drastically altering it’s product offering or revenue model.
Rounding it Up
A high or growing burn rate is not appealing if there isn’t corresponding growth – but it poses a perplexing problem that resists a simple solution. Founders who feel under the gun need to look extremely closely over operating costs, market conditions, and company positioning to know which area is underperforming, why it is so, and what can be done about it. In almost every case, the issue can be resolved by implementing changes in one of the areas mentioned above, bringing company cost structure into closer alignment with revenue projections.
ABOUT THE AUTHOR
Adam Liposky is young professional with experience in consulting, startups, technology, investments, and operations. Adam’s passion for technology and entrepreneurship has guided his career path. Over the course of his career, he has worked with public and private companies in a variety of industries to activate change and increase efficiency through technology. In his most recent role at a venture capital fund, Adam has analyzed hundreds of startups in dozens of markets, giving him a wide ranging viewpoint and approach to business. Learn more about Adam.