The cost of maintaining a startup today
GVA LaunchGurus translated for you this undoubtedly entertaining article by Mark Saster, a partner of Upfront Ventures. Mark answers the question "What is the normal level of monthly expenses for maintaining a startup for today?"
Mark Saster:
Now there is a lot of talk about the fact that the cost of startups is decreasing and will continue to fall, and the time for attracting funding is increasing. As I wrote in my posts, 91% of the surveyed venture capital funds believe that prices are falling (30% believe that the decline is significant), and 77% believe that now the search for investments will take longer than before.
')
Bloggers (entrepreneurs and representatives of venture funds) came to the same conclusions: you must begin to raise funding at the early stages and reduce the amount of monthly expenses for a startup, because it affects how much you can survive without resorting to finding new funds.
But the most difficult question is: “What is the acceptable level of the company's monthly expenses for the maintenance of the company?”, And if someone answers a specific figure, then I will be skeptical, because there is no universal correct answer. Everyone decides for himself, and I want to offer you the general principles for calculating this amount, taking into account the following factors:
How long does it take to attract investment, taking into account the stage of presence in the market?
The earlier a round of financing takes place, the less capital you need, the more accurate your calculations, the less time it usually takes to search for investments. In other words, finding 2 million dollars at a project cost of 6 million is always easier and faster than attracting 20 million at any project cost.
I understand that it seems to be obvious, but still: for companies in the early stages of development, there are more available sources of funding, since less data to analyze (as a rule, you need to evaluate only the team and the product) and the probability of error is less. At the stage of later rounds of funding, there is more data to be comprehensively checked, which includes: customer call-ups, financial performance analysis, cohort analysis (to determine trends by the type of changes in customer churn rates), competitor evaluation and more detailed study of the qualifications of the management team.
Although there is no universal recipe, I had previously advised to expect that it would take 4.5 months to complete the initial stage of attracting investments, and stock up on funds for 6 months if the process drags on. But lately, deals have been concluded within 2-3 months or even faster, and in this period a round of financing may well meet in the early stages.
My advice is: be cautious, start research in advance, study investors before you need funds, determine the one that suits you best, and kill yourself that attracting investments is a permanent part of your work, and not a periodic activity during the fundraising season in 2-3 months per year. Those who believe that attracting investment only “distracts from the main business” do not understand that running a business consists of: product delivery, sales, customer service, marketing, team building, talent search, financial reporting, and ensuring the availability of funds to support the business. .
In other words, the search for investments is a constant part of the work of the director (financial director) of the company, and whether you spend 5% or 20% of your time on this - the process goes on all year round, even if in the background.
If you think about why Uber so quickly became a leading player in the industry, the reason is that besides the excellent software and business, successfully chosen time for innovation, they just knew how to constantly empty the capital market to increase their business, leaving no chance to competitors to attract investment.
Who are your current investors?
The size of the monthly expenses for the company directly depends on who your current investors are, and I strongly recommend to conduct an honest dialogue, find out how much they would like / are willing to invest in your business. It always amazes me how few entrepreneurs are frank with investors.
For some reason, most of the businessmen I know do not ask questions to investors. Is it not better to know your position? You can always bring your thoughts politely, and even if investors are not so frank with you in response, this will also tell a lot.
So, if you have an active investor known for helping his partners in difficult times, ready to write you another check, then you can, without fear, increase the amount of monthly expenses, unlike the situation when you do not have such an investor.
If you cooperate only with angels, or are not sure that your investor can support you without seeking funds on the side, then it may be worthwhile to lower the costs of maintaining the business.
Remember these "massive" rounds, offering higher prices and favorable conditions for entrepreneurs who have become so popular in recent years? If you go this way, I would advise a little more thoroughly to calculate the size of the monthly expenses for the maintenance of the company. And here's why: if five organizations give you 500 thousand dollars, then you will face three problems:
1. None (nor two) of these organizations assume responsibility for the common cause. This is a kind of “ Community Tragedy ”, where a single player is not responsible for improving the overall resource. The reverse situation is when there is an active investor who takes responsibility, following the rule of Potter Barn , popularized by Colin Powell, according to which he “broke-bought” (or repaired).
1.2. When such a small (relatively) amount is at stake, no one really feels the need to make improvements to the project. If each organization invests only 500 thousand, and things go badly, they will simply write off these funds, and the benefits of making improvements are not worth the effort, because their share is too small.
1.2. You will also come across a “ free rider effect ”, because if 3 out of 5 investors take part in company affairs, but 2 (free riders) do not want, often these 3 companies will not want to move or will want to recapitalize, so as not to carry away free riders. The recapitalization process is so often detrimental to the founders that it is often avoided. And if out of five organizations only one craves for activity, then, most likely, it will simply choose to write off the money spent.
Have your investors not exhausted the opportunity to help your business?
This is another point that I advise entrepreneurs to think over and which I even recommend to clarify with their venture funds. I will speak openly to better clarify the situation.
In Upfront Ventures, we write out 90% of the first checks at the seed or round A stages (and 2/3 of them are A rounds), and 10% of the first checks (by number) are written out during the B rounds. As an investor who mainly invests during round A with a fund of $ 300 million, our average check is 3-5 million. We invest about half of the fund's amount in initial investments and “reserve” about 50% of our investments to further support successful transactions.
Naturally, if the company’s business is amazing, we will try to invest more money, and if the company develops slowly, we will be more careful. But even if the company develops slowly, we will at least write one more check to them, provided that they offer something new, and so far we see that they are focused on achieving long-term viability of the business and conducting sound financial policies. .
In the most promising transactions, we plan to invest 10-15 million dollars for the period of the fund. That is, if we have invested 3-4 million in your company, it is likely that you will still receive some support from us, and not because we undertake too many obligations, but because allocating 1-2 million to overcome difficult periods is part of our contingency strategy.
If, on the other hand, we have already allocated 10 million, and we do not see three other investors at the table, and a business costs 800 thousand dollars a month (that is, you need 10 million a year, or almost 15 million a year and a half) - we have already done everything we could to help your business, because we will not invest 25 million in one company with our size of the fund. Therefore, even if we LOVE your company, in this situation we will not be able to help during difficult periods.
It is necessary to soberly assess the capabilities of current investors and the needs of your company.
How much capital is available to you?
Speaking of current investors, we mean access to capital, because if you already have a venture capital fund, then there is access. And then you just consider the possibility of attracting new venture funds or the ability of the current fund to support you in difficult times.
I am talking about access to capital in the context of attracting finance, since this access is the decisive factor in the course of fundraising. If you studied at Stanford with several venture capital founders who consider you a friend (and who respect you), and if you rotate in the highest circles of organizations such as Facebook, Salesforce.com, Palantir or Uber- you naturally have virtually unlimited access to capital. But many do not have such connections. If you have only angel investments and, perhaps, a small amount from seed funds of not so well-known or completely new players, then you have more limited access to capital.
How risky are you?
It is impossible to determine the size of the monthly expenses for the maintenance of a company without knowing how much you are willing to risk. In other words, some are ready to put everything at stake and accept the consequences of failure if they do not succeed. And some are more cautious, they have something to lose if the company does not succeed (they may have invested their own money or family savings).
Therefore, when people ask me for advice, I usually ask the following questions:
• How long have you been involved in the project?
• How much money have you / your friends / relatives invested? Is this a significant amount for them?
• How careful are you? You are more likely to be cautious or are you inclined to act according to the principle “who does not take risks, he does not drink champagne”?
There is no right answer to these questions. Only you know how it is. Ask yourself how much you tend to risk.
Again, this is probably obvious, but in fact, not always.
Some companies may become “cockroaches” or “self-supporting organizations”, cutting expenses and cutting people, and stretching investments for 2 years to support a business. But this may have an impact on the future growth of the company. As a result, you may have a company of dubious value in your hands, because without capital injections there will be no possibility of introducing innovations and becoming a leader in the market. Of course, this option is suitable for someone, but not for someone.
One more thing. It may seem that it is permissible to “maximally tighten”, but it may also turn out that your team did not want to be part of such a company, and it turns out that you have reduced the staff to a minimum, and this minimum will leave you. Simply put, if you are going to dismiss everyone, make sure that the people you are going to leave agree with this decision.
Profit, which is enough to cover the costs, is quite enough for some teams, but this perspective does not suit others. You decide. Compare the monthly expenses with the available capital and how much you are willing to take risks.
How fair was the latest company rating?
There are two more factors to consider. First: how correctly the company was evaluated in the last round. If you raised 10 million in a preliminary assessment of a company with a limited income of 40 million, and if your investors say they doubt that third-party organizations will want to invest money in your company at current rates, I would recommend to be more economical - even if it means a reduction in monthly expenses. There are only four possible solutions to this problem:
1. Make sure that current investors will continue to invest - even if third parties are not interested.
2. Reduce monthly expenses so that you end up with funds in the amount of the estimated value.
3. Reduce the size of the company's value in advance, so that third-party organizations want to invest in your performance.
4. Be bold with the hope that the market will appreciate your innovations, even if the price for them turns out to be higher than the market wants to pay.
How complicated is your capitalization table?
Entrepreneurs rarely understand the capitalization tables. Once again, I advise you to speak frankly with representatives of your venture capital funds, or at least with those whom you consider to be most disposed towards open dialogue.
If you raised 2 million during the planting round with a preliminary estimate of $ 6 million, then 5 million in round A with a preliminary estimate of 20 million, then 20 million during a round B with an estimate of 80 million, and your company is “stalling” then you may have problems with the capitalization table. Let me explain.
An investor who has invested 20 million may think that your company will never be worth 300 million dollars or more (they invested, expecting to at least triple the amount). And if they prefer to return their 20 million, rather than risk even larger amounts, they may want to sell your company at any price. Even if they sell it for 20 million, they will think: I have a preferential right in case of liquidation, so I will return my money.
Investing at an early stage receives 15% of your company and expects huge profits (after all, the company was valued at 100 million, taking into account investments only 12 months ago). But they have exhausted the possibilities to help the company, because, being an investor at an early stage of the company's development, they are highly dependent on investors of the B round, or external capital.
They will not want to sell the company for 20 million, because they still believe in you and they know that they will not receive their money when selling (and your personal share in the sale will be insignificant).
You will find yourself in a classic capitalization deadlock. You may not even realize that the investors of the last round no longer support you.
Solution: enlist the support of investors in the seed and round A. Perhaps they will be able to reason with investors in round B. Or they will encourage you to cut costs. Maybe they will propose making adjustments to the capitalization table as a compromise. Or they may find out that the investor of round B does not move from their positions. At the very least, you'll know what your position is before deciding what to do with your expenses.
Please note that I am not trying to convey my subjective judgments about investors in sowing rounds, A, B rounds (or C, or investing rounds on company growth). Just trying to explain that they do not always agree, and most entrepreneurs do not understand the logic of investors.
Additional information for reading
You can read about business expenses in my earlier article.
Mark Saster is an Upfront Ventures partner. He joined the company in 2007, after 8 years already collaborated with Upfront Ventures as an entrepreneur “on two fronts”. Prior to joining Upfront, Mark held the position of Vice President of Production Management at Salesforce.com, after the company was bought by Koral, where he in turn was one of the founders and CEO. Prior to Koral, Mark ran his own BuildOnline- European software company (SaaS), which was later bought out by the SWORD group. Mark is always looking for enthusiastic entrepreneurs to invest in projects in the early stages of technology development. His areas of interest include digital content and distribution, AdTech, consumer Internet technologies, and SaaS companies; Mark has impressive experience in this sector, given that he has already founded and sold two companies. Follow the link to read his articles in his blog "Two Sides of the Table " ("On two chairs").
The original article can be read on the link in the blog.
Mark Saster:
Now there is a lot of talk about the fact that the cost of startups is decreasing and will continue to fall, and the time for attracting funding is increasing. As I wrote in my posts, 91% of the surveyed venture capital funds believe that prices are falling (30% believe that the decline is significant), and 77% believe that now the search for investments will take longer than before.
')
Bloggers (entrepreneurs and representatives of venture funds) came to the same conclusions: you must begin to raise funding at the early stages and reduce the amount of monthly expenses for a startup, because it affects how much you can survive without resorting to finding new funds.
But the most difficult question is: “What is the acceptable level of the company's monthly expenses for the maintenance of the company?”, And if someone answers a specific figure, then I will be skeptical, because there is no universal correct answer. Everyone decides for himself, and I want to offer you the general principles for calculating this amount, taking into account the following factors:
How long does it take to attract investment, taking into account the stage of presence in the market?
The earlier a round of financing takes place, the less capital you need, the more accurate your calculations, the less time it usually takes to search for investments. In other words, finding 2 million dollars at a project cost of 6 million is always easier and faster than attracting 20 million at any project cost.
I understand that it seems to be obvious, but still: for companies in the early stages of development, there are more available sources of funding, since less data to analyze (as a rule, you need to evaluate only the team and the product) and the probability of error is less. At the stage of later rounds of funding, there is more data to be comprehensively checked, which includes: customer call-ups, financial performance analysis, cohort analysis (to determine trends by the type of changes in customer churn rates), competitor evaluation and more detailed study of the qualifications of the management team.
Although there is no universal recipe, I had previously advised to expect that it would take 4.5 months to complete the initial stage of attracting investments, and stock up on funds for 6 months if the process drags on. But lately, deals have been concluded within 2-3 months or even faster, and in this period a round of financing may well meet in the early stages.
My advice is: be cautious, start research in advance, study investors before you need funds, determine the one that suits you best, and kill yourself that attracting investments is a permanent part of your work, and not a periodic activity during the fundraising season in 2-3 months per year. Those who believe that attracting investment only “distracts from the main business” do not understand that running a business consists of: product delivery, sales, customer service, marketing, team building, talent search, financial reporting, and ensuring the availability of funds to support the business. .
In other words, the search for investments is a constant part of the work of the director (financial director) of the company, and whether you spend 5% or 20% of your time on this - the process goes on all year round, even if in the background.
If you think about why Uber so quickly became a leading player in the industry, the reason is that besides the excellent software and business, successfully chosen time for innovation, they just knew how to constantly empty the capital market to increase their business, leaving no chance to competitors to attract investment.
Who are your current investors?
The size of the monthly expenses for the company directly depends on who your current investors are, and I strongly recommend to conduct an honest dialogue, find out how much they would like / are willing to invest in your business. It always amazes me how few entrepreneurs are frank with investors.
For some reason, most of the businessmen I know do not ask questions to investors. Is it not better to know your position? You can always bring your thoughts politely, and even if investors are not so frank with you in response, this will also tell a lot.
So, if you have an active investor known for helping his partners in difficult times, ready to write you another check, then you can, without fear, increase the amount of monthly expenses, unlike the situation when you do not have such an investor.
If you cooperate only with angels, or are not sure that your investor can support you without seeking funds on the side, then it may be worthwhile to lower the costs of maintaining the business.
Remember these "massive" rounds, offering higher prices and favorable conditions for entrepreneurs who have become so popular in recent years? If you go this way, I would advise a little more thoroughly to calculate the size of the monthly expenses for the maintenance of the company. And here's why: if five organizations give you 500 thousand dollars, then you will face three problems:
1. None (nor two) of these organizations assume responsibility for the common cause. This is a kind of “ Community Tragedy ”, where a single player is not responsible for improving the overall resource. The reverse situation is when there is an active investor who takes responsibility, following the rule of Potter Barn , popularized by Colin Powell, according to which he “broke-bought” (or repaired).
1.2. When such a small (relatively) amount is at stake, no one really feels the need to make improvements to the project. If each organization invests only 500 thousand, and things go badly, they will simply write off these funds, and the benefits of making improvements are not worth the effort, because their share is too small.
1.2. You will also come across a “ free rider effect ”, because if 3 out of 5 investors take part in company affairs, but 2 (free riders) do not want, often these 3 companies will not want to move or will want to recapitalize, so as not to carry away free riders. The recapitalization process is so often detrimental to the founders that it is often avoided. And if out of five organizations only one craves for activity, then, most likely, it will simply choose to write off the money spent.
Have your investors not exhausted the opportunity to help your business?
This is another point that I advise entrepreneurs to think over and which I even recommend to clarify with their venture funds. I will speak openly to better clarify the situation.
In Upfront Ventures, we write out 90% of the first checks at the seed or round A stages (and 2/3 of them are A rounds), and 10% of the first checks (by number) are written out during the B rounds. As an investor who mainly invests during round A with a fund of $ 300 million, our average check is 3-5 million. We invest about half of the fund's amount in initial investments and “reserve” about 50% of our investments to further support successful transactions.
Naturally, if the company’s business is amazing, we will try to invest more money, and if the company develops slowly, we will be more careful. But even if the company develops slowly, we will at least write one more check to them, provided that they offer something new, and so far we see that they are focused on achieving long-term viability of the business and conducting sound financial policies. .
In the most promising transactions, we plan to invest 10-15 million dollars for the period of the fund. That is, if we have invested 3-4 million in your company, it is likely that you will still receive some support from us, and not because we undertake too many obligations, but because allocating 1-2 million to overcome difficult periods is part of our contingency strategy.
If, on the other hand, we have already allocated 10 million, and we do not see three other investors at the table, and a business costs 800 thousand dollars a month (that is, you need 10 million a year, or almost 15 million a year and a half) - we have already done everything we could to help your business, because we will not invest 25 million in one company with our size of the fund. Therefore, even if we LOVE your company, in this situation we will not be able to help during difficult periods.
It is necessary to soberly assess the capabilities of current investors and the needs of your company.
How much capital is available to you?
Speaking of current investors, we mean access to capital, because if you already have a venture capital fund, then there is access. And then you just consider the possibility of attracting new venture funds or the ability of the current fund to support you in difficult times.
I am talking about access to capital in the context of attracting finance, since this access is the decisive factor in the course of fundraising. If you studied at Stanford with several venture capital founders who consider you a friend (and who respect you), and if you rotate in the highest circles of organizations such as Facebook, Salesforce.com, Palantir or Uber- you naturally have virtually unlimited access to capital. But many do not have such connections. If you have only angel investments and, perhaps, a small amount from seed funds of not so well-known or completely new players, then you have more limited access to capital.
How risky are you?
It is impossible to determine the size of the monthly expenses for the maintenance of a company without knowing how much you are willing to risk. In other words, some are ready to put everything at stake and accept the consequences of failure if they do not succeed. And some are more cautious, they have something to lose if the company does not succeed (they may have invested their own money or family savings).
Therefore, when people ask me for advice, I usually ask the following questions:
• How long have you been involved in the project?
• How much money have you / your friends / relatives invested? Is this a significant amount for them?
• How careful are you? You are more likely to be cautious or are you inclined to act according to the principle “who does not take risks, he does not drink champagne”?
There is no right answer to these questions. Only you know how it is. Ask yourself how much you tend to risk.
Again, this is probably obvious, but in fact, not always.
Some companies may become “cockroaches” or “self-supporting organizations”, cutting expenses and cutting people, and stretching investments for 2 years to support a business. But this may have an impact on the future growth of the company. As a result, you may have a company of dubious value in your hands, because without capital injections there will be no possibility of introducing innovations and becoming a leader in the market. Of course, this option is suitable for someone, but not for someone.
One more thing. It may seem that it is permissible to “maximally tighten”, but it may also turn out that your team did not want to be part of such a company, and it turns out that you have reduced the staff to a minimum, and this minimum will leave you. Simply put, if you are going to dismiss everyone, make sure that the people you are going to leave agree with this decision.
Profit, which is enough to cover the costs, is quite enough for some teams, but this perspective does not suit others. You decide. Compare the monthly expenses with the available capital and how much you are willing to take risks.
How fair was the latest company rating?
There are two more factors to consider. First: how correctly the company was evaluated in the last round. If you raised 10 million in a preliminary assessment of a company with a limited income of 40 million, and if your investors say they doubt that third-party organizations will want to invest money in your company at current rates, I would recommend to be more economical - even if it means a reduction in monthly expenses. There are only four possible solutions to this problem:
1. Make sure that current investors will continue to invest - even if third parties are not interested.
2. Reduce monthly expenses so that you end up with funds in the amount of the estimated value.
3. Reduce the size of the company's value in advance, so that third-party organizations want to invest in your performance.
4. Be bold with the hope that the market will appreciate your innovations, even if the price for them turns out to be higher than the market wants to pay.
How complicated is your capitalization table?
Entrepreneurs rarely understand the capitalization tables. Once again, I advise you to speak frankly with representatives of your venture capital funds, or at least with those whom you consider to be most disposed towards open dialogue.
If you raised 2 million during the planting round with a preliminary estimate of $ 6 million, then 5 million in round A with a preliminary estimate of 20 million, then 20 million during a round B with an estimate of 80 million, and your company is “stalling” then you may have problems with the capitalization table. Let me explain.
An investor who has invested 20 million may think that your company will never be worth 300 million dollars or more (they invested, expecting to at least triple the amount). And if they prefer to return their 20 million, rather than risk even larger amounts, they may want to sell your company at any price. Even if they sell it for 20 million, they will think: I have a preferential right in case of liquidation, so I will return my money.
Investing at an early stage receives 15% of your company and expects huge profits (after all, the company was valued at 100 million, taking into account investments only 12 months ago). But they have exhausted the possibilities to help the company, because, being an investor at an early stage of the company's development, they are highly dependent on investors of the B round, or external capital.
They will not want to sell the company for 20 million, because they still believe in you and they know that they will not receive their money when selling (and your personal share in the sale will be insignificant).
You will find yourself in a classic capitalization deadlock. You may not even realize that the investors of the last round no longer support you.
Solution: enlist the support of investors in the seed and round A. Perhaps they will be able to reason with investors in round B. Or they will encourage you to cut costs. Maybe they will propose making adjustments to the capitalization table as a compromise. Or they may find out that the investor of round B does not move from their positions. At the very least, you'll know what your position is before deciding what to do with your expenses.
Please note that I am not trying to convey my subjective judgments about investors in sowing rounds, A, B rounds (or C, or investing rounds on company growth). Just trying to explain that they do not always agree, and most entrepreneurs do not understand the logic of investors.
Additional information for reading
You can read about business expenses in my earlier article.
Mark Saster is an Upfront Ventures partner. He joined the company in 2007, after 8 years already collaborated with Upfront Ventures as an entrepreneur “on two fronts”. Prior to joining Upfront, Mark held the position of Vice President of Production Management at Salesforce.com, after the company was bought by Koral, where he in turn was one of the founders and CEO. Prior to Koral, Mark ran his own BuildOnline- European software company (SaaS), which was later bought out by the SWORD group. Mark is always looking for enthusiastic entrepreneurs to invest in projects in the early stages of technology development. His areas of interest include digital content and distribution, AdTech, consumer Internet technologies, and SaaS companies; Mark has impressive experience in this sector, given that he has already founded and sold two companies. Follow the link to read his articles in his blog "Two Sides of the Table " ("On two chairs").
The original article can be read on the link in the blog.
Source: https://habr.com/ru/post/299866/
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