“It’s not about the money… It’s about sending a message.’”
– The Joker, Batman – The Dark Knight
Once one of the key areas of focus for CEO’s and CFO’s alike, the concept of Burn (as in “Burn Rate” for your business) seems to have lost its cachet as a critical KPI for many angel and venture backed start-ups. Whether it’s a delusional CEO who believes a white knight will come in and solve any potential cash crunch down the road, or a company flush with millions of VC cash and no real plan how to allocate it; a failure to properly manage a company’s Burn will literally lead to it ending in flames.
Some have even referred to Burn as a “vanity metric” believing that it tells very little about whether a company is on track. Sorry, but if there’s ever any indication we are entering into or in the midst of a bubble, referring to Burn as a vanity metric is certainly one of them.
As both an investor in and advisor to a number of start-ups (and having launched a few myself), effective Burn management is a key indicator of whether a CEO truly understands how to manage their business and if they will be good stewards of an investors money.
Notice how I say “effective Burn management”???
Indiscriminately cutting costs and/or not (re)allocating those resources to areas that need it isn’t proper Burn management. In fact, doing so can put a company in jeopardy just as much as indiscriminate spending – it just may take longer to realize it. Effective Burn management is knowing which financial levers to pull in order to move your company and its product or service forward, while ensuring you have the maximum amount of runway in case of the unexpected.
Do you spend money on a large marketing campaign or use those same dollars to bring on additional developer resources to get your product hardened prior to launch? Do you allow a developer to burn through resources on a tangential use case, when those same dollars could help generate sales lift through a Salesforce product placement or SEM effort? Or more simply, can you accomplish the same thing over a videoconference as opposed to spending money on travel to a distant city? Everyone in the organization – not just the CEO or CFO - should ask questions such as these routinely.
Effective Burn management is a mind-set, a critical piece of your culture, a key genome to your organizational DNA.
For my part, I look at Burn management from the standpoint of milestone achievements. Here I breakdown the amount of available capital by the number of key milestones to meet the company’s broader objective. This objective can be anything from building a prototype for market testing to the actual launch of a new product. Each milestone will have its own set of costs and the summation of those costs should closely match (or ideally be less than) the amount of available capital. How well a company is at prosecuting against a milestone while managing the allocated cost helps to ensure that capital resources aren’t allocated to the whim of the day, but actually used to move the ball forward. This builds a track record of success that can then be used to demonstrate to current and future investors that the company understands how to properly manage its resources to achieve a stated goal. A big risk mitigator for those looking at investing in your company.
Future or follow-on funding is never guaranteed. Only you can manage how far your funding will last and whether at the end of the day you can point to a track record of success or whether you let your Burn get the best of you. Remember, effective Burn management isn’t just about the money. It’s about the message it sends to your employees, your partners and your investors.