How much should a growing SaaS business burn?

As an investor, I’m often asked what sort of burn rate is appropriate for a growing company. This question seems to come up right after a Series A raise when the startup feels flush with cash, has some level of product/market fit, and is wondering how much and how fast to try to grow.

For SaaS companies in this situation, my rule of thumb for burn guidance is to have a one year ratio of net burn to net new MRR. In other words, if you are growing through $30K of net new MRR, I’d be comfortable as an investor with you burning $360K a month (30,000 x 12 = 360,000). Your $30K of net new MRR pays back this months burn over the next year. Of course it also matters how much cash on hand and runway you have and it matters that you’re still seeing other healthy metrics as a result of that burn over time. This rule of thumb also assumes a reasonable operating margin and healthy limits on churn.  So you have to watch those things carefully, as always. At earlier stages, it’s more art than science and of course the ratio makes no sense at all if you have no revenue.

Please be careful if you’re just skimming this post looking to justify a big burn! I’m talking about net new MRR (the amount of MRR you’re ADDING each month, not the current level of MRR or CMRR. If your current MRR is $100K and you’re adding $10k of net new MRR each month, my rule of thumb would only work out to about $120K per month burn. Much lower. Growth rate matters when you’re learning in and stepping on the gas.  

I also think this rule of thumb applies to in-revenue companies in the typical Series A to Series B range, and not indefinitely. I’m not sure I’d ever get comfortable with millions in burn per month for a SaaS company (although others have), so apply sanity tests outside the typical Series A to B scenario.

In Bessemer’s wonderful “state of the cloud” report for 2017, slide 35 illustrates this similarly but on an ARR basis. Their “efficiency score” is the ending ARR over the net burn, where ratios > 1 are best.

And, of course, this rule of thumb only applies if I think you’re not close to market saturation. As long as I feel like there’s plenty of room in the market to go get it, then I’m generally comfortable with this rule of thumb. And if you’ve just raised your Series A, presumably you and your investors have that belief!

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Metrics for Startup Success

What is the right startup success metric?

I was recently asked why we celebrate fundraising amounts as opposed to other meaningful metrics, such as revenue, recurring customers or staff size. To be perfectly honest, it’s a struggle to find intermediate metrics for startup success.

In our industry, funding is used often as a measure of success, but this is by no means a perfect metric. Just because you raise money doesn’t mean you should celebrate. Securing funding doesn’t automatically mean your company is going to be successful. Think Color or Quirky. If we measure success by fundraising, then these were huge successes. But clearly they were not actually successful.

There are other meaningful metrics to consider, such as impact, number of employees, amount of revenue or number of customers. All of these are reasonable intermediary proxies, and we take them as signals of success, which is the best gauge we have in this industry. But no one factor by itself is sufficient to compare the success of startups. For instance, you could try to use number of employees as a metric, but sometimes great companies are built and create a lot of value while hiring very few people (think Craigslist).

When we say that Techstars companies have raised $3 billion, that’s a proxy for activity, but it’s not a measurement of success. Ultimately the measure of success is the return on investment—and we’re fortunate to have some pretty great returns on Techstars. However, you don’t know how “successful” a particular company is until you actually get that return on the investment. The problem is exacerbated because we are also judged on imperfect intermediary metrics like funding by our capital partners. It’s the best we all have until companies are more mature. Startups are a long-hold, long-term type of asset.

In the long term, you can absolutely measure success based on return to investors. But on an intermediate basis, it’s truly a struggle to find the right way to measure startup success. I’m sure you’ll have some ideas for the comments.

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Don’t Make Yourself Indispensable

When you’re first starting a company, you’re right there in the thick of it, all the time. During that heavy lifting phase, you naturally have to throw yourself into getting your startup off the ground and figuring things out.

But it can’t go on like that forever. Obviously your own personal health would take a hit, but it’s also a sign of poor health for your company if it relies on your presence in order to exist.

So once you’re a little farther along—after you have things figured out and have a good market fit—as the CEO you need to start thinking about working ON the business instead of IN the business.

You should be able to go away for a month or two and still have your business run just fine without you there.

Now, that doesn’t mean you should run away to Cuba for six weeks right off the bat. Start out by testing the waters by staying out of the office for a couple of days. Next, actually leave town for a few days. During these test periods, remain accessible and see what happens. What do people send you emergency texts about? Did it turn out that there are some things only you know how to do? Was there something only you have the authority to take care of? Figure out what information you need to share with other members of your team.

This is all about surrounding yourself with great people and ensuring they have the ability to handle every aspect of the day to day business. In November of 2015, I took an entire month off work. I was able to do that because I have a great team and the business was healthy enough to run smoothly for a month without me.

Refusing to become indispensable doesn’t mean you aren’t important to the company, or that your contribution isn’t valuable. But when it comes to day to day operations, if you have to be there in order for things to work, it’s an indication that you’re not building the company the right way. If you get to this point, as a special bonus, you’ll get to focus more on strategy instead of tactics and this will in turn move the needle even more.

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Coaching Up!

Time and time again I’ve seen how important quality relationships are to a startup’s success. I really appreciated the focus on authentic connections in Jordan Fliegel’s book Coaching Up!

Jordan is an alumnus of Techstars, and his company, CoachUp, is a service that connects athletes with private coaches. He started CoachUp because of his life-changing experience with a private coach, and his desire to make that opportunity available to more kids. Jordan is also a cofounder (along with Jeremy Levine, another Techstars alum) of Bridge Boys, a seed investment fund in Boston.

Coaching Up! demonstrates how anyone can use coaching techniques to better connect with, engage, support and inspire other people. It offers concrete advice and a skill set for leaders who want to learn how to more effectively build connections and motivate coworkers, teammates or even family members.

As I noted earlier, the focus of this book is forging authentic connections with people, which is why I highly recommend it for startup founders–or anyone who is leading an organization. Honing your ability to build and develop authentic connections is critical, and Coaching Up! provides some practical insight about how to develop those skills.

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Australia, We Hear You!

I recently spent a week in Australia. One of the things I often say when I travel to speak to startup communities around the world is: “We can’t hear you!”

My point is that I want them to be loud and proud about what’s going on there. Often I hear them lamenting about not enough capital, not enough startups, not enough success, or whatever. I challenge them to start acting like what they want to become–to start talking about their greatness.

I also ask them to start blogging. Start some dialogue.

My favorite example of this was the “tall poppy syndrome” that exists in Australia, a long-standing cultural attitude of fostering hostility toward successful people. I was speaking to a group of Australian entrepreneurs and I suggested that someone there blog that tall poppy syndrome is a thing of the past. So they did! And now, tall poppy syndrome is closer to disappearing. It’s no longer going to be cool to talk about tall poppy syndrome. It’s going to feel uncool and out of the norm

Sometimes what we believe will be true becomes true!

It’s great to see communities acting like what they want to become. And it’s great to see them making some noise:

Australia, I hear you!

Applications are now open for our first Techstars accelerator program in Australia as well!

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“No” Doesn’t Mean “You Suck”

I know it can be counter-intuitive, but just because an investor says “No,” it doesn’t mean they don’t love what you’re doing.

Keep in mind that as venture capitalists, our job is to say “No” 99+ percent of the time!

That means we often say “No” to things we love and founders we love. Even when we really don’t want to say “No,” we still end up saying “No.” Sometimes it just means we love what you’re doing, but we don’t love it quite enough to actually make the investment. Or, sometimes it’s just not in our targeting and/or thesis to make the investment.

Unfortunately, when venture capitalists say “No,” founders often hear: “We think you suck.”

The reality is that, many times when we say “No,” sometimes actually means: “We think you’re great, but we believe in something else more, and we have very limited capital to deploy.”

If you’re hearing “No,” it just means you’re a normal entrepreneur dealing with normal investors. Instead of taking “No” as an insult, take it with the recognition that capital is limited. Even though you may very well be on to something, you’re probably going to get a “No” from lots of investors. It’s just part of the game. “No” is a learning experience.

I find myself on both sides of this process. When we’re raising money for our venture fund, we might meet with 50 or 100 investors, and guess what? We’ll hear “No” from most of them. We have plenty of people that say, “We love what you’re doing, but it’s just not for us.” That’s a reasonable response from an investor, and it’s all part of the process.

So if you’re hearing “No” a lot, don’t give up. Keep your head up, and move on to the next venture capitalist until you find the right investor for you. Eventually you’ll find those few investors who really believe in you, the ones who get excited about what you’re doing and want to invest their limited capital in your startup, the ones who will say: “Yes.”  That’s when magic happens.

One last point – I see many examples where “no” turns into “yes” over time. If you’re offended by a “no,” you may forget to come back a year later. As an example, most companies that apply to Techstars don’t get in on the first try. They hear “no,” they get stronger, and they come back later. And that’s perfectly ok to do.

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