How to reduce burn rate in startups
One of the main reasons startups shut down is they run out of cash because of a high burn rate. Burn rate, defined by experts, is the amount of money a company is either spending (gross) or losing (net) per month and while startups and investors are known to be concerned about net burn rate, they should be equally concerned about gross burn because startup revenues can quickly dip due to a range of micro and macro reasons, not excluding an economic downturn.
Generally, the perception is that startups across the board, early or later stage, in Asia or in the West, product focused or services, could do with more frugality.
As an entrepreneur I know that a startup’s journey can be altered if the following tips are followed at the right time, so at the cost of them being repetitive, hopefully they will serve as timely reminders to ambitious entrepreneurs as the consequences of a high burn rate doesn’t stop short of their startup’s demise.
Don’t follow the herd
‘Unicorn’ a term coined by the investment community in the US signifies a startup that’s valued at $1 billion or more, thus by definition making them a rarity, and the hunt by investors for potential ‘Unicorns’ more and more difficult. A much-coveted status, startups put themselves on trail to attain Unicorn status so they get under investors’ radar.
Restaurant discovery startup Zomato that was some time back awarded the Unicorn status, recently laid off employees in the US as a price for its high burn rate including the cost at which it was acquiring customers.
On the other hand, a little over a year old, Chandigarh based startup, Jugnoo, is through its app offering on-demand auto-rickshaw services and also enabling hyper-local deliveries, and in my view playing the right ‘survival’ game. Jugnoo focusing on multiple revenue streams by leveraging its network completely and while based in a smaller city is rapidly planning expansions across India and abroad.
My experience has taught me that start-ups should be operating on the survival instinct—focusing on building products, dealing with competition, being lean and nimble on the assumption that future funding may not be available.
These parameters at the end of the day are more real than valuations made by venture capitalists, which do not denote the true value of a startup.
As an entrepreneur, my advise would be don’t go about blindly doing what other funded startups have done because many in that bucket have failed. A myth about big startups that have received millions of dollars in venture funds is that they are too big to fail.
The reality is that the most well-funded startups with millions of dollars of funds may still have not planned their finances well and in fact may have fallen into the ‘heavy’ trap making it impossible for them to change quickly—a key requirement of startups that are synonymous with experimentation.
The wise ones don’t allow themselves to fall into this trap, and by staying lean, pursue early on 2 or 3 business models, to see which one actually works.
Focus on profit
The best way to stretch the funds from venture capitalists or angels is to focus on not just breaking even but making a profit. Startups that focus on increasing revenue so that they become profitable are on the right track.
Focusing on increasing revenue does not mean raking in millions but controlling costs and spending from going out of hand. Each startup needs to look at its own reality and spend accordingly and also be flexible, as burn rates will vary depending on the stage the startup is in its lifecycle—product, user, or revenue.
Large multinationals first showed foresight in hiring remote talent. In order to get the best talent on board these companies have policies allowing employees to work remotely, from home, and on flexi schedules. There isn’t any reason why startups shouldn’t follow suit.
Startups enlarge their talent pool when they include professionals that have the skill set but are not physically close to the startup’s location. Hiring remote talent would not just come at a more affordable cost, but also may reduce the startup’s office overhead expense in cities like Gurgaon, Bangalore or Mumbai, where both the cost of living and doing business is exorbitant.
Relatedly, a trend one is seeing with many startups is to make their base in smaller Tier 2 and 3 cities. Jugnoo, mentioned earlier is based in Chandigarh, which in addition to being less expensive than the big metros is also less cruel to entrepreneurs than them during tough times—when experiments fail, and products flounder.
Control the marketing budget
It’s a chicken-in-egg situation and startups in their single-minded obsession to increase the number of users, visitors, customers etc. believe spending on marketing will get them that traction. Spending indiscriminately on marketing can make burn rates go through the roof, without the desired return, something startups need to avoid at all costs (no pun intended!).
It’s more advisable for startups to focus on their content strategy. Great content positions you as the expert in the field, it’s free, and its impact is long term, if you stick with it consistently and keep the bar high.
Marketing spend at the end of the day should be treated as discretionary versus necessary.
Equity, equity, equity
Everyone isn’t daring enough to be an entrepreneur and start their own companies, but as the last few years have borne witness, more and more talented professionals are willing to bite the startup bullet. Many of these professionals are from premier educational institutes and could be working with Fortune 500 companies but have chosen a career in startups, which while far more volatile also move faster, with more intensity and one that gives them freedom to innovate, and most importantly, a stake.
Employees at startups are one of its greatest assets and giving them a stake would help in motivation and retention and in situations where paying steep salaries is not possible.
Consistently keeping startup burn rates low is difficult, because as in life, unaccounted incidents happen without warning, but entrepreneurs can’t afford to let the ball drop too often, too soon. Being an entrepreneur keeps one on the toes—watching cash flows in the bank and how long they will last, devoting time to raising funds, spending time on customer acquisition but not at the cost of neglecting employees, looking for growth not for the sake of growth through non-paying customers but profitable ones, all add to the reasons entrepreneurs have sleepless nights.