COMMIT RESOURCES WISELY
Raising ample funds is one side of the financial equation that will determine the length of your startup runway. The other is your burn rate, the negative cash flow likely to be created during your launch. As you build your venture with an eye toward managing risk, preserving flexibility, and staying in the game, your rate of spending will be a critical lever for extending and stretching your time and cash.
Don’t confuse raising money with the need to spend it. Instill a disciplined process of managing your commitment of funds and monitoring projected cash levels. The more judiciously you manage expenses, the more you multiply the power and impact of whatever capital is available.
Mark Williams gives much credit for Modality’s early staying power to the role of Nancy Owens, who first came on board in a parttime accounting and finance role but soon became his CFO and chief administrator. “Nancy, along with great financial advisers around us, helped us manage cash and operate with a high level of capital efficiency,” he says. “You want to raise as much capital as you can, but you have to be extremely careful in how you utilize those resources.”
Keep in mind that committing resources wisely is not the same thing as minimizing all costs. Once you have chosen the right starting point, you will enable your venture’s growth by making targeted investments, not by completely avoiding them. Bob Tucker remembers that J. C. Faulkner’s approach to spending money during D1’s launch was well planned, focused, and confident. “Something that J. C. did that I believe is an earmark of success: Focus more on what you want to spend and what you want to spend it for, than on trying to curb the expense,” he said. “In other words, make the expenditures well thought-out, prudent, and necessary in support of the business plan, as opposed to thinking ‘let’s save everything we can.’ That’s not your objective. Your objective is to enable and support the business plan.”
A key factor determining where and how you commit your early - stage resources will be the pace with which you intend to launch and grow your venture. The right pace for your particular business will, in turn, be driven by many factors, including your purpose as an entrepreneur (What pace will best align with your personal goals?), the nature of your market opportunity (How robust is market demand for your offering?), related competitive forces (Is your window of opportunity narrow or wide?), and your business model and strategy (What rate of growth will best position you to create value in proportion to the opportunity?).
By mid-2010, Mark Williams and his team faced a set of divergent opportunities for growth. Their research and development efforts continued to generate potentially game-changing innovations for Apple’s iPhone and iPad products, as well as enterprise-wide learning solutions for educational institutions, healthcare systems, and large corporations. Focusing on innovation would call for a deep investment of time and capital with uncertain returns. At the same time, Modality’s steady investment in its catalog of licensed educational and reference products for mobile devices had led to a library of nearly 150 products and a reliable revenue stream. The company had also begun to generate fees for providing digital publishing services for major publishers. Each of these areas of opportunity brought a unique set Of risks and requirements, and Mark and his team faced tough choices regarding where to invest limited resources.
As a general rule of thumb, I have found that most startup founders, driven by their enthusiasm and commitment, attempt to do too much, too fast. Successful entrepreneurs often look back on their path to value creation as less like a sprint than a marathon, one that balances urgency and desire with watchfulness, patience, and good judgment. As Amar Bhide, visiting scholar at Harvard University’s Kennedy School of Government, wrote in his classic piece on bootstrap finance in the November-December 1992 Harvard Business Review, “Start-ups that failed because they could not fund their growth are legion. Successful bootstrappers take special care to expand only at the rate they can afford and control.”9
