How to invest your funding
Balancing burn rate and runway in a startup is probably one of the most critical tasks a CEO must deal with. I have a policy of keeping everybody in the team up to date on how our bank accounts are looking, but day-to-day and month-to-month decisions on expenses still depend on me.
Now, it's no secret that startups operate at a loss for quite some time.
How fast you become cash flow positive varies significantly from company to company, with some startups achieving break-even point in the first few months. We did back in 2018. And others like Twitter are still struggling to do so even after an IPO. Often, they end up featured in Company Forensics!
We have a policy of sharing some of our finances and our lessons as part of our transparency marketing. We started doing this back in 2015, inspired by companies like Buffer and Baremetrics, whose own blog posts and materials were an inspiration for us.
We are taking a trip down memory lane to understand how Slidebean was formed, where the first money came from, and how we spent it.
These are our first $250K.
We officially started working in Slidebean around May 2013, which put us at around 7 years since we founded it. Pretty crazy.
This is where the first money came into the company:
May 2013: $35K by myself and Carao Ventures (I would call this a founding round, not even a friends and family).
November 2013: $70K by Startup Chile and by a Costa Rican Seed Capital fund (both equity-free government grants).
May 2014: $25K by DreamIt Ventures, as part of their New York accelerator.
September 2014: $100K by 500 Startups.
January 2015: $250K by Carao Ventures, Edge Harris Ventures, and DreamIt Ventures.
In 2016 we raised another post-seed round, but that's a story for another day.
Believe it or not, the first Slidebean MVP took about two weeks to make. We built a Squarespace landing page with a quick explainer video and a fake sign-up form- just to measure people's interest.
Still, building our first 'usable' product did take a few months. There are three things that I believe we did right during this period, which was critical to getting us to where we are today.
Assigning salaries early on:
From day one all three co-founders had a designated salary. I believe this is fundamental to a company's success and very often overlooked. I've seen many startups that agree not to have a fixed salary and simply cover living expenses for the founders. This approach can lead to very awkward discussions when a founder wants to fly to visit their family for Christmas or buy a present for their significant other.
Even if it's a small symbolic amount, everybody needs to have some money that they can spend without having to explain themselves to the rest of the team.
Same salary for all founders:
For most of the early company track, we agreed that all three founders were to be compensated equally. This created a sense of transparency and equal commitment among all three of us: we all should be working as hard as we can, and nobody should make more money for doing so.
We decided that if the company could not afford salaries, we would delay that payment until we had some money in the bank. Thus, if we had to use our credit cards or borrow money to get through the month, we knew that we'd eventually be paid back.
Our 50/50 burn rate approach:
If we used our initial cash to work on Slidebean 100% of our time, we would have been broke before we could raise any money.
This is why we decided to use part of our time to do consulting work.
During the early stages of Slidebean, we made approximately $5K a month in projects for third parties, including online marketing and web development. We probably used 40-50% of our time in consulting work and used the rest to work on Slidebean. This allowed us to work on the tool without burning through our cash too fast.
Eventually, we hired a junior developer that took care of most of the consulting work while leaving our CTO's schedule 90% clear to work on Slidebean. This was a product-intensive period, and this is how the financials looked:
Startup Chile is an early-stage accelerator that offers an equity-free grant of approximately $35K. Your team is required to move down to Santiago for the 6 months of the program.
By the time we got accepted into the program, we had almost finished building our first beta, which we had launched before relocating to South America.
Being a government grant, the use of funds was rigorous. Aside from the initial cost of flying to Santiago, our burn looked something like this:
We decided to keep one staff member in Costa Rica to continue working on the ongoing consulting work we had, which we supervised from Santiago. It was clear that we wanted to dedicate 99% of our time to Slidebean, but with a $10K+ burn rate, we needed to keep some of our consulting work to avoid running out of money too fast.
Our time in Startup Chile was critical to start testing our product with real potential users. Our advertising spend went towards signing people up and checking our onboarding process.
We signed up around 5,000 users during this period and started testing our business model.
Since we had no time to implement a payment gateway, we tested our subscription model with a fake paywall. If a user required a feature we were planning to charge for, they'd get a message asking if they wanted to subscribe for $5/mo. If they clicked 'Proceed,' the feature would be unlocked automatically.
Using this approach, we discovered that around 8% of our active users would take the bait, which gave us some insights as to how our business model was looking.
- Focus on user tests and gathering their feedback. We were able to get cheap sign-ups with - - - Facebook Ads and monitored their behavior closely.
100% dedication to Slidebean. The fact that we moved to the same apartment was critical for this.
- Keeping consulting work back in Costa Rica to help sustain operation costs. A separate staff handled this, so the core team would not be distracted from Slidebean.
- Experimenting with the business model early on and getting some (very) early conversion rates.
- We didn't start charging for the platform. I believe that this could have boosted our traction significantly and look back at it as one of the biggest mistakes we made in this process.
- Implementing our payment system should have been a priority.
- The feedback we received and prioritized came from 'users' but not from 'customers'. Again, we should have focused on that billing system.
- We didn't experiment with different customer acquisition channels. While we spent some money on Facebook ads, a lot of it went to students who we later discovered weren't willing to pay for our services. Our current acquisition cost is very different, and we could have had a head start in optimizing it.
We had planned to become a US Company all along. This is why halfway through the Startup Chile program, we started applying to some US Accelerators. We were accepted in DreamIt Ventures in May and relocated to New York.
I had been through a startup accelerator on my previous company, and still felt it was important to do it again for two reasons:
1- So my co-founders could experience this crash course too.
2- To have a connection in the US.
Recommended video: Are startups accelerators worth it?
We are foreign founders, and jus landing at JFK with no connections is a slow start. An accelerator would solve that, allowing us to build a network, connect to investors, and press faster.
Similar to what we did in Chile, we decided to launch the platform in the first few weeks after the program started. We were able to get a lot of press attention about our launch, precisely because it was linked to us joining an accelerator in the city.
Our burn during this period looked something like this:
Even though living in New York was significantly more expensive than living in Santiago or San Jose, we were short on cash and could not afford to adjust our salaries. The company did pay for our apartment, though.
While I had been focused on marketing/growth during the previous period, we wanted to leverage DreamIt's network as much as we could to get in front of investors. We hired a good friend of mine to manage our press during this time so that I could focus on investor meetings and Fundraising.
This was a big mistake that could have cost us our company.
Fundraising is an exhausting and discouraging process: you pitch your life's project only to get rejected 99%-100% of the time (remember high school dating?).
In our case, we made the terrible mistake of spending 25%+ of our team's time in trying to raise money, when our company was far from ready to do so.
With a recently launched platform, we were making about $1K in MRR. Being our first $1,000, we felt that this was enough proof that our business model made sense, but we were mistaken.
- Kept our burn rate low thanks to our Costa Rican operations, which were pretty much self-sufficient by now.
- Leveraging DreamIt Ventures for the press and getting a lot of relevant intros.
- Spending/Wasting too much time trying to raise money when our company wasn't ready for it.
- Spent $3K+ in fundraising trips to Cali and Philly.
- Not spending enough time, money, and effort in reaching relevant MRR metrics.
I don't tell this story very often, but when we got accepted into the 500 Startups accelerator, we had about two weeks of the runway. I was bringing the ill news to my co-founders when the acceptance email came in.
500 Startups' absolute focus on growth was vital to bring our company to where it is today. During this process, we pivoted our target audience: from our initial consumer market focus to a B2B play for small businesses and startups.
This happened thanks to our weekly meeting with the staff and their endless (and often brutal) push to re-think our business. They turned out to be right.
Their investment was also the first significant pile of money we had raised. It gave us some peace of mind and some flexibility to start spending more money in discovering our growth channels and measuring our CAC and LTV:
- Pivoted our business model into B2B and changed our pricing plans significantly (we increased our pricing by 5x).
- As we moved into startup major leagues, we disconnected Slidebean completely from our Costa Rican consulting operations., That company became a separate business altogether.
- Focus on acquiring customers. We finally nailed some positive unit economics and acquisition channels with Google Search Ads.
- We hired a Customer Success person who was key to increasing conversion rates. She also let us discover how much we needed a direct line of live support with our customers.
- We didn't waste time in Fundraising; 100% dedication to product and growth.
- After the program ended, we couldn't retain our Customer Success person and were forced to make a new opening. Never underestimate the time and cost of replacing someone.
- We came into the program at an earlier stage than other companies. This meant that we had to play a bit of catch up during the accelerator to avoid being a 'less-relevant' company in Demo Day.
One thing was evident when we finished our 500 Startups process: we were on our own. Growing our company and pushing the bar every month was entirely up to us.
We were able to secure a $250K seed round, and we expanded the company to 6 full-time employees, mostly based in our Costa Rican office.
We kept a New York shared office space where I would still spend about 40% of my time, mainly to keep our investor and contact network active for our upcoming fundraising efforts.
This allows us to official remain as a 'New York' Startup, while keeping our costs down (t's cheaper to fly to NY for one week every month, than actually living there).
The challenge for any startup at this point is balancing net burn rate and growth. There are two extremely different approaches for a company at this stage:
For companies running low on cash reserves and seeking to break even as soon as possible. Low to no spending on growth experiments, no new hires.
An approach for companies that assume they can raise their next round of funding.
Here, there is no focus on reaching a break-even point; on the contrary, the priority is continuing with accelerated growth to engage future investors. If the growth is great, investors will come.
I believe neither approach is ideal. On the first hand, investors expect fast and dynamic companies rather than 'safe' strategies. They've already invested and assumed the risk of funding a startup. A company with such slow growth will not give them a substantial return on their investment.
On the other hand, focusing exclusively on revenue growth without paying attention to the net burn rate makes the company depend on future rounds of investment, which might or might not come in time.
Through 2015 and 2016, we saw 20% MoM revenue growth which we have achieved by repeating the following approach:
1. Experiment with new acquisition channels ($500-$1000 tests).
2. Carefully measuring the CAC and LTV of each channel.
3. Once a channel is confirmed as profitable (LTV > 2.5x CAC), we double the investment in that channel and continue monitoring it to ensure the +2.5x is maintained.
4. Start over.
Recommended video: How to grow a small business
We find good profitable channels that we continue investing in until that channel becomes 'depleted' (where more spending results in unsustainable acquisition costs). These channels are the main drivers of our monthly growth.
We released our actual financial records for the year 2015. Our goal during this time was keeping our burn rate between $15K and $20K.
Remember, we had just raised a round. The purpose was investing this cash in growing aggressively. A monthly burn rate of $15K to $20K meant that the money we had just raised would last for 15 months or so.
As our revenue grew, from $3K to $20K/mo in the span of those 12 months, we expanded the team, always keeping an eye on the monthly burn, and not allowing it to exceed $20K.
By 2016, we reached around $50K in MRR, in just one year, so raising a new round of funding was, honestly, one of the easiest parts.
It doesn't get easier, having to be so careful about your spending is most certainly distracting. Anyway, if you feel that your company is ready to raise capital, we can probably help- grab one of our pitch deck templates or get our team to help you write or design your slides.
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