- One of the most leading causes of death for startups
is a mismanaged burn rate.
Now whether you're venture-backed or you're bootstrapped,
how you manage your burn rate,
whether you're spending an appropriate amount every month,
determines the success of your startup.
But here's the big question,
what exactly is burn rate?
How do you actually calculate it
and how do you optimize for it?
These are the three things I'm gonna cover in this video
given my experience in the SaaS space
over the last 15 years.
And when you follow these three principles,
you'll know exactly how to calculate your burn rate
and how to optimize it so you can accelerate the growth
of your SaaS business.
Intro.
(upbeat music)
What's up everybody?
Welcome to "Unstoppable."
I'm TK, and on this channel.
I help SaaS founders like you grow your SaaS business faster
with an unstoppable strategy.
Now, if you're new to this channel, welcome.
I drop an episode every single Sunday
with actionable strategies and tactics from the trenches
on how to grow your SaaS business faster.
So be sure to hit that subscribe button
and that bell icon where you'll get notified
every single time I drop an episode with the TK energy.
If you're already part of this community,
if you're part of this channel, if you're part of my SaaS,
go-to-market coaching programs, my people, welcome back,
it's really awesome to see you over here.
Now, over the last 15 years,
I have been part of a bootstrapped company that I've grown,
I've been part of a venture-backed company that I've grown
and exited, and I've been part of a PE backed company
that we turned around and then exited for $4.75 billion.
In all three of these cases, how we managed our burn rate
and how we spent our cash was critical to their success,
even for the venture back company,
at one point we were spending over a million dollars a month
and we had to right size that to 115K a month,
and we still drove growth in those changes.
This is the art of burn rate management.
So in this episode, I'm gonna walk you through
the three principles you have to know
on how to manage your burn rate.
So if you're excited to dig in,
go ahead and smash that like button
for the YouTube algorithm and let's get right into it.
All right, so principle number one
is how do we define burn rate?
And people tend to overcomplicate this,
or they think they know this,
but until I really laid it out, I was like,
oh, okay, that's how it works.
One of my CFOs I used to work with really explained it to me
in the right way.
Burn rate is essentially the difference
between how much money you had in the beginning of the month
and at the end of the month.
More specifically, you take the money you have
in the beginning of the month, in terms of cash in bank,
you add in how much cash you collected in sales.
This is an important distinction.
It's all about how much actual cash is coming in.
So let's just say you sell a product
that's a $100,000 but if the customer is not paying
for the a $100,000 in that month one
then it doesn't count.
You only count the amount of cash that's coming in,
it's on a pure cash basis, that's all that matters.
Then you subtract out cash spent on expenses
And then you end up with your burn rate.
And to add to that, if you actually take your cash in bank
and you divide it by your burn rate,
you basically get your runway,
meaning how many months you have until you run out of cash
given how much you spend every month
and how much you're bringing in every month.
That's it, that is the calculation for burn rate.
And the reason this is so powerful
is because it can be so overwhelming when you're like,
oh my god, our burn is this much and are we gonna make it?
What's our runway?
Do we need to raise that next round?
Or if you're bootstrapped,
you're like can we spend more money on driving growth
for the business?
And it can be really overwhelming,
and I've had that as a founder.
When you look at it in these distinct components
it helps you really break down to like,
all right, we have money and when we sell stuff,
sales is all that matters, more money comes in,
and then we take away how much we had to spend
to earn that money, and that is our burn rate.
And if you have a negative burn rate,
it means that you're spending more money
than you're bringing in.
But if you have a positive burn rate,
it means that you're actually accumulating more cash
and you can drive towards profits
which you can then reinvest into the business
or take as dividends or pay yourself,
depending on how your company's structured,
whether you're bootstrapped or venture-backed.
This is one of the cool things
that a lot of the venture-backed founders don't realize.
When bootstrapped founders have a surplus in cash,
they can just pay themselves more money.
They can just earn take that money.
Whereas in a venture-backed company you're like,
oh, good job, go spend more of it so we can grow faster.
And maybe 10 years down the line you'll get an exit
and you'll get that money.
So it's a subtle difference in how you operate the business.
There's no right or wrong,
it's just different ways these businesses work.
But when you think about these three components
it really gets broken down to,
all right, what do I do to optimize this burn rate?
And I'll tell you this, when I see venture-backed companies,
they tend to overspend, their burn tends to be too high,
they spend too much to drive that growth.
And when I look at bootstrapped companies,
they have the extreme opposite problem,
they don't spend enough, they're so stingy with their cash,
they don't spend enough on the growth
to really drive growth around the business.
And the reason for this is the same.
They don't quite understand
how money is flowing through the business
and what yields more cash, that's it.
And so that goes into principle number two,
understanding what drives this burn rate for you,
whatever this number is.
Let's just say you're burning a $100,000 month,
that's negative $100,000
Let's just say you have an surplus of $100,000 a month.
Do you take it for yourself and go to Ibiza?
Do you reinvest it in the business?
Thinking in terms of these distinct components
helps you really optimize your burn,
because really as a business,
you don't wanna leave opportunity costs on the table.
Meaning, if you have a way where you can spend more money,
and earn more, you wanna take advantage of it.
Whereas on the other hand,
if you're spending a bunch of money
and it's not really driving ROI for the business,
it's not bringing back cash,
then you wanna spend less of it.
That goes into principle number two,
which is how do you understand the components to burn rate?
This falls right underneath over here,
the cash in the bank is basically
what you seeded into the business
or what you brought from another business
or you raised money around, right?
So that's pretty easy.
Now, cash in sales is essentially a function of your sales,
your marketing, and your go-to-market machine.
That's essentially what is bringing in the cash.
So this is why it's super important,
I always ask like look out of your burn rate,
how much of it is going into sales and marketing?
How much of it is going into investing
into your go-to-market strategy?
How much of it is going into actually bringing your product
to the market?
The critical components that really drives cash in sales,
meaning are you actually bringing money in,
so that you shift that equation on how much you're spending
versus how much you're bringing in which impacts your burn,
is what's your go-to market strategy?
And so that directly impacts this over here.
Now, when you think about cash spent on expenses,
it can be really overwhelming
and a lot of founders don't even know
where the money's going,
which is why any great part-time CFO or CFO
or accounting firm you work with
will give you here are your top 20 vendors every month,
here's where your money is going,
which will help you understand where the money's going.
But really your money that you're spending goes into R&D,
it goes into sales and marketing,
it goes into general and administrative expenses.
That's roughly the three buckets it goes into.
And so most companies are really spending money on people.
That's the most expensive aspect
of building SaaS businesses.
So a lot of money will go into your engineers,
your sales people, your customer success people,
your support people,
then there's some money on infrastructure costs,
then there's some money on stuff like offices,
electricity and internet and computers, that goes under G&A,
stuff like engineers goes under R&D,
and then your sales reps, your marketing spend,
your customer success reps, goes under sales and marketing.
And what you wanna understand is how much of your expenses
are going into each of these areas.
Now, this is very broad and every company is different
but roughly most SaaS companies spend 20% on R&D,
and the rest of it really goes towards sales and marketing.
And what you really want to figure out is
are you spending enough money in your sales and marketing
so that it feeds into this system
and actually drives actual money coming in?
The money you tend to spend here has more immediate results
on bringing cash back in.
Whereas the money you're spending on R&D,
on features that may or may not hit the market,
or are few months out,
won't have an immediate impact on cash coming in.
Similarly, maybe you're spending money
on a really expensive law firm,
maybe you're spending money on some expensive dinners,
maybe you're spending money on these fancy sponsorships,
I'm not judging on any of these,
but those you'll want to ask what is the ROI
on spending that money?
And this is the way optimizations really get done.
In my lessons learned,
when I was running the bootstrapped company
we were under investing.
So we had to figure out, well, where do we invest
and how do we run a more efficient go-to-market strategy
and invest more,
because we have the cash, we have the surplus,
let's grow faster.
In my venture-backed business,
we were were like we have to spend the money,
that's what investors want from you, so let's go spend it.
But we were seeing that we were spending money
on things that weren't positive ROI.
So we had to re-shift that.
And when we did, growth followed.
And it can be really scary and overwhelming
to look at this runway number,
go down look at this giant negative burn rate, right?
You're looking at like this is how much money we're burning,
like this is outrageous
and you can be really easy to get overwhelmed by that.
But if you just look at it like, cool, what are my expenses
and where is the money coming in from?
And am I spending money on things
that's gonna bring back money?
It can be very easy to make some tough decisions,
because you're looking at it in a ruthless perspective.
This is one of the biggest things I learned
having worked with a company that was backed by a PE firm.
They go in and they take a ruthless approach
to what's returning money and what's not?
And so you really wanna make sure
that you're spending money in the things that's driving ROI.
Now I have a principle number three
on exactly the type of things you can do
to really optimize this equation.
But before I go into that,
let me just pause here for a second.
Are you starting to see the power on this?
Are you starting to see the power
in how this simple equation and these key components,
when you look at it objectively can completely change
and empower you to build an efficient business?
And right now, at the time of this filming,
regardless of whether you're bootstrapped or venture-backed,
efficient businesses, efficient go-to-market strategies,
is what is required in SaaS.
And this is what the bar is,
whether you're going to raise a round,
or you're just operating a profitable business,
you have to be efficient.
And so thinking in terms of cash and sales,
what's cash coming in and what am I spending money on
and are those things bringing in cash?
Can really help you have a constructive discussion
about are we doing this right?
Is our burn rate efficient or not?
Before we're going principle number three,
if you're starting to see the power in this,
can I just get yes in the comments below,
and also smash that like button for the YouTube algorithm?
It really likes it when you do that.
Also, if you're in this stage where you're like,
you know what? We need to bring in more cash,
we need to be more efficient in our go-to market,
we really need to figure out how to spend more money
in our sales and marketing,
then I encourage you to check out my five point
SaaS Growth Strategy Guide.
It's completely free and goes into details on five key ways
you can drive growth for your SaaS business.
You don't have to go anywhere right now,
I'll link to it below,
I'll tell you more about it at the end of this episode.
Let's go to principle number three,
but smash out like button for the YouTube algorithm
'cause it really likes when you're do it, so do we,
we put a lot of love into these videos.
So principle number three is if you have a burn rate
that is not good, you're like, this is not sustainable
we need to improve our burn rate, what do you do?
I'm gonna list out a few things that have worked really well
in my 15 years of experience
in being part of these companies.
The number one thing you can do
is create a 13 week cash flow forecast.
This is something where you can get a template for online.
There's lots of free templates.
This is something you can ask a part-time CFO to do for you
or an accounting firm to do for you.
Sometimes there are SaaS offerings for this,
but really looking at your expenses
and forecasting out here's the money that's going out
on a week by week basis over the next 13 weeks,
and here's the money that we're forecasting to come in,
gives you a view of exactly what your burn rate
and what your runway looks like over the next 13 weeks.
And every single time I've seen business operators do this,
they got a more clarified understanding of their business
and they were able to optimize things
at a whole different level.
So doing that makes a huge difference
in starting to optimize these pieces
and really understand what's the money going out,
what's coming in, what money am I spending
that's really driving the money to come in?
What are short-term bets?
What are long-term bets?
And should we do them now or should we not?
And should we spend more or should we just go to Ibiza
with that money?
The second thing you can figure out
is do you have the right team?
A lot of SaaS companies just have too many team members,
or they have people that aren't yielding revenue.
And so rough rule of thumb is
for every employee you should have roughly 120K in ARR.
And so you should really figure out
how many people do we have
and are we generating the right amount of cash?
Is that productivity right?
Do we have the right people under sales and marketing
which is what brings in cash?
Or are we overindexed on R&D?
And maybe we need to fix that balance a little bit?
It can be very easy to say, no, we need these 500 engineers,
they're gonna build this feature, that's gonna be amazing.
But the truth of the matter is, given your runway,
those features may never see the light of day
unless you have salespeople and a go-to-market strategy
that's driving results right now.
And so you can start to think about
do we have the right size of the team
or do we need to change that size, change that composition,
so we're spending money on people
that are bringing money back in.
The third thing you can look at, and I mentioned this,
is you can look at your top 20 expenses.
What are you spending money on, on a monthly basis?
Every month, what are the top 20 vendors?
And you can eliminate expenses.
I guarantee as soon as you look at that report
of the top 20 expenses,
you will find things that you can go renegotiate,
cut, or find a better alternative.
And any one of those three things are being done right now.
And that's just what the market is demanding.
And you'll find that there's a lot of inefficiencies
in the vendors that you're working with.
And the final thing that you can do
is you can invest in go-to-market.
Ultimately in business, it's not about trying to keep
as much as possible,
it's trying to figure out a way where you put a dollar in
and $2 comes out.
Meaning if you're spending a dollar in expenses,
you're earning back $2.
Ultimately, that's what business is,
and that's what we're trying to do.
SaaS businesses, the really successful ones,
are cash printing machines, they just spew cash.
You put in a dollar and you figure out a way
to generate $2 from that.
And that's what we're trying to get to.
And the critical component to doing that
is making sure you're investing in sales and marketing
and a go-to-market strategy.
When you do these two things,
you're gonna be able to increase
the efficiency of that business
and you're gonna be able to take that surplus cash
and put it back in,
and create this infinite loop of it getting
bigger and bigger and bigger and bigger and bigger,
and that's essentially what you're trying to do.
Every dollar that's coming in,
you wanna be able to feed back into an efficient
go-to-market machine, so that another $2 comes out.
And then you pay your expenses, take the extra dollar,
and put it more in, and then you keep compounding.
That's what great businesses are made of
and that's what investors wanna see,
and that's what any owner of a bootstrapped business
wants to see as well.
And so ultimately, investing in your go-to market
is the biggest path to optimizing your burn,
improving your runway.
And if you're looking at raising money,
being really attractive to investors.
To recap, principle number one,
is this is the equation for your burn rate,
what's the cash in the bank?
How much cash came in at the end of the month
and how much cash was paid out?
That's how much you're burning.
Number two, the critical components
is what categories are you spending cash into
and how much of those are actually driving back results
in terms of money coming back in?
And that's your go-to-market machine.
And number three is if you need to optimize your burn,
look at doing a 13 week cash flow forecast.
Look at right-sizing your team,
look at your top 20 vendors you're spending money on,
and eliminate expenses,
or move it over to a lower cost vendor
or renegotiate your contracts.
And most importantly,
figure out how to build an efficient go-to-market machine,
so that you have a business where you're putting in a dollar
and $2 is coming out, that's the goal,
that's the type of business that investors want,
and owners of bootstrapped companies want.
And either way,
those who can't lose cards in this environment.
And lastly, if you're at this stage where you're like,
okay, cool, now I know what these components are,
and I really want to figure out how to grow the business,
what does an efficient go-to-market machine look like?
What are the five key ways I can drive growth?
And go ahead and grab a copy
of my Five Point SaaS Growth Strategy Guide.
It's completely free and it highlights
the five key ways you can revamp your go-to-market strategy,
and drive growth for your SaaS business.
If you wanna grab a copy of that,
just go to getunstoppable.com/strategy,
getunstoppable.com/strategy,
and I'll also include the link in the description below
so you can click on that as well.
Also, if you got value from this video,
please smash that like button for the YouTube algorithm,
it just loves it when you do that, and so do we,
my team and I put a lot of love into these videos.
If you have a fellow founder, or a fellow team member,
part of a Slack group, a WhatsApp group,
that would get value from this video,
please share this with them.
We wanna help as many SaaS leaders as possible
through this channel.
And lastly, I drop an episode every single Sunday,
with actionable strategies and tactics from the trenches
on how to grow your SaaS businesses from actual experience.
So be sure to hit the subscribe button on that bell icon
and you'll get notified every single time
I drop an episode.
And lastly, remember, and lastly, lastly, lastly, remember,
everyone needs a strategy for their life and their business,
when you are with us, yours, it's gonna be unstoppable.
I'm TK, I'll see you the next episode
or inside the Five Point SaaS Growth Strategy Guide,
link is below, take care.
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