Pick Your Spending Rate Wisely

When you have funding, remember that your investors did not invest for you to hold back and be too conservative. They expect you to build value by making bets, taking risks, and owning the consequences. Pick your spending rate wisely.

Managing the finances of a startup is always a balancing act. Picking the right spending rate to best accomplish value-adding milestones involves making judgments along a spectrum ranging from conservative to aggressive. Yet where to land on the spectrum varies over the life of the startup and is affected by the startup’s development stage, derisking progress, and opportunities. Since these things change and the pressure is sometimes intense, it is possible to get stuck or miss the mark, so this is an area to develop a conscious awareness of.

The Risks of Overspending

Sometimes startup teams get “lucky” and raise more money than they are ready to spend. Yet, even with abundant funding, overspending can also be disastrous. I know of examples where startup teams raised money, even hundreds of millions, and foolishly spent it on non-value-adding things like game rooms, luxury travel and workspaces, and other incredibly wasteful endeavors. This is a recipe for a flameout failure. Remember that what funding you have should always be invested to build value effectively, even if you end up making big bets to move the needle.

Challenges of a Poverty Mindset

At the other end of the spectrum, a startup often experiences seasons where money is incredibly tight, and decisions on what is possible to do are constrained by those resource limitations. Yet, if it persists, such careful financial management can be taken too far, and a “poverty mindset” can emerge. Honestly, I don’t want to claim that a poverty mindset is always dysfunctional.  It isn’t. Sometimes, it is essential in some phases of a startup’s development to stretch the runway and not spend ahead of the progress gating factors. In fact, I believe most startups at their earliest inception stages fall into this category, where capital efficiency is imperative.

However, sometimes you need to recognize when to break free of that financial conservatism or risk choking your startup.  For example, early in my entrepreneurial career, I was first bootstrapping and then constantly raising money in small angel rounds so that almost as soon as I could raise a bolus of funding, I had to begin working on the next round practically immediately.  It was a classic problem of building the funding bridge just a step ahead of where we were trying to run to.  The process was grueling, and I felt enormous pressure to make every dollar count and be as capital efficient as possible. I felt “poor,” and I focused on squeezing every ounce of value out, leading a very lean team, adding team members cautiously, and stretching our runway as we sought to hit the next most important milestone. I avoided “applying money” as a problem-solving strategy unless absolutely necessary.  In other words, my “poverty mindset” made me more conservative, careful, and cautious in spending.  Eventually, even as we raised additional capital, it was hard to loosen the reins and spend more aggressively.

While these are scenarios when conservative financial management is essential, conservative management also sacrifices some of a startup’s greatest advantages: agility, speed, and greenfield development opportunities.  As my most successful startup to date advanced, one of my wise colleagues pointed out that as our commercial traction took hold, my poverty mindset was beginning to limit our growth and opportunities.  He challenged me to see that I should break out of that mindset, become more aggressive in taking risks, boldly invest in building out the team, infrastructure, marketing to accelerate our growth.  By intentionally breaking our poverty mindset, we became the fastest growing life science tools company to date for a time. Achieving that acceleration result required a conscious shift from conservative spending to more aggressive investment. 

Be Intentional in Changing Your Spending Dial

As your startup develops, you must constantly judge where you need to fall on the spending aggressiveness spectrum from a capital-efficient mindset to a more liberal position which involves making bigger bets to accelerate value creation. These choices reflect what derisking milestones you have accomplished and whether the startup is ready to multiply spending bets into accelerated value. Here are some tips to consider when making these choices:

1. Become conscious that you are making a considered choice at various stages – and act with intention. Do not fall prey to getting stuck in one mode because either end of the spectrum can be both appropriate and wrong depending on your startup’s evolving circumstances.
   
   
2. Lean towards more cautious spending when many things are hard to see accurately or out of your control.  For example, FDA timelines and follow-up requirements are notoriously variable, so do not bet that you know when those essential clearances are coming through and staff up your commercial team in anticipation. Similarly, when developing innovative prototypes where you are really trying to schedule inventions, realize that the unknown unknowns can create significant time delays, so add a mental multiplier to whatever your best completion date estimate is and spend accordingly to avoid being caught running out of runway unexpectedly.
   
   
3. Give yourself and your team time to learn from the marketplace at the earliest stages of going to market. One of the riskiest investments is prematurely committing to building out a salesforce. Generally, scaling up a salesforce involves hiring expensive team members ready to crank a well-developed product with a confirmed value proposition. At that point, pouring on the investment can yield multiplying returns. However, if you jump too soon, such as when the very first early adopter customers are coming online and manufacturing scale-up is still being worked out, you may find yourself saddled with an expensive sales infrastructure that cannot generate enough revenue to pay for itself.  This can be a very fast way off a funding cliff. Mitigate the risk by validating your product feature set and value proposition with live beta testing in customers’ hands, early adopter pilots, and other techniques to uncover product gaps, enable refinement, and confirm product-market fit before pouring on the gasoline.
   
   
4. Pour on the gas when you have mitigated the risks. When you have reduced the risks to a manageable level and begun to gain commercial traction, then you may be positioned to maximize your startup’s value by investing to accelerate growth by growing the team, investing in marketing, building out manufacturing, and broadening your product line.  These can be big and fruitful bets if your startup is ready for them. Don’t miss the opportunities if you reach the point where you can rapidly turn investment into value.   
    
5. Develop a good relationship with your experienced executive team members, especially your CFO, and encourage them to be mindful of the rate of spending along with you and provide input. Sometimes someone else can recognize if you have gotten too conservative or too aggressive. Different perspectives can help you realize if you should consider adjusting your approach to better align with your startup’s evolving circumstances.