How to balance growth and burn rate in startups?

It’s always a tightrope when balancing between growth and keeping burn in check especially in current volatile market. This summary from Point Nine Managing Partner Christoph Janz’s talk at SaaStr gives a great framework to manage it.

In the current environment, growth is not going to be rewarded at any cost.

📈 Companies can go from boom to bust in a matter of months.

🥵 Slow growth + High spend = (Higher burn, shorter runway, Less ARR, less investor interest)

If you need to raise in such a situation, you need to raise at a much lower valuation or a down round.This can be a matter of life and death.

Become Default Investable:

There is never one factor or two that makes a company investable. Growth is still very important. If you are not growing atleast 2X every year, its hard to get investors excited.

But it is not growth at any cost. Efficiency is very important.

There are two ways to measure efficiency.

1. Burn Multiple

What this means is think about how much runway you have.

Burn multiple tells you how much capital do I have to raise for $1 of Net New ARR.

Net New ARR = New ARR from new customers + Expansion ARR from existing customers — Churned ARR.

When you are in the beginning, the burn multiple can be low.

2. Sales Efficiency

If we put both these in a 2X2 matrix, you can make some important observations:

Top Right

If you are on the top right, everything is on the track.

Bottom Right

Sales efficiency is good but overall burn multiple is too high.

You should not cut cost across the board to increase the runway.

Here, you have an opportunity to increase your sales and marketing spend until it stops to be efficient.

In this quadrant, you should try to cut cost at everything that is not sales and marketing like R&D, G&A etc. And move more budget to sales and marketing.

It might be counter intuitive but if you have an efficient sales and marketing, then try to increase your budget there and save money in other places.

Top Left

But if you sales and marketing efficiency is low, and your burn multiple is also low, that means overall you are okay. But you are wasting money in sales and marketing and you might let go some of them and reduce your marketing spend.

Bottom Left

Reduce spend across the board.

Key Takeaways

1. You can have an ambitious upside, but your runway planning should be based on more conservative growth.
2. Keep a close eye on net new ARR, be fast to adapt and have a “burn budget”.
3. If you cant become “default alive”, become “default investable”.
4. Depending on your burn multiple, and your sales efficiency number, you may want to move budget from G&A, R&D, to S&M, the other way round, or reduce cost across the board.

Bonus Tips to Increase Runway

1. Switch more customers to upfront payments
2. De-grandfather customers on old, lower — pricing plans.
3. Try increasing your pricing
4. Let go of your bottom 5–10% performers.
5. Move on from any VP that isnt amazing. (Good idea even if you have enough runway)
6. Get better at collections
7. Renegotiate with your vendors.
8. Reduce paid marketing spend.
9. Consider venture debt or revenue based financing.