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How will your burn rate increase after the round? – take a deep breath, its bound to increase
Here’s what they mean…
We talked about burn rate. It’s how much you’re spending each month. But now you are raising again and likely for a lot more money than you raised before with the expectation you are going to grow a lot faster. Growth comes at a cost. Here’s what you need to say when asked “how will your burn rate increase after the round?”
As you execute new strategies and scale channels, everything from marketing to customer success will scale up. This means burn will increase. This means you need to have a plan for the money you are asking for when asked this question; “How will your burn rate increase after the round?”
A prudent CEO will think about the burn rate constantly. Once they raise the money they are not having a Champagne party, hiring their girlfriends on 6 figure salaries and leasing them cars (This actually happens).
Ironically, there is a rule of 18 months. It says that no matter how much you raise, founders will find a way to blow it 18 months.
You need to be thinking about how you are going to manage and grow your business. Yes, it can feel like there is cash burning a hole in your pocket, dying to be spent, and many founders fall for that temptation (encouraged by investors), but you need to know when is right to spend and when you should save.
How will your burn affect your runway? Is it sufficient to help you hit your defined milestones for the next round?
Do you really need to double burn the moment you close? Have you done all the prep work for key hiring decisions for that to make sense?
If you fumble to come up with a number, you have not been thinking about your financial plan in enough detail.
The best answer will probably break it up into phases since you will not bring up your burn rate to the max immediately (Well you shouldn’t anyway). You should also be outcome orientated, spend should be thought in terms of outomes. And it will likely be conditional on things coming to pass. It’s all very well to think things will go to plan, so long as you have a downside and upside plan.
What you need to say
“My plan is to hire department heads first so that they can build out their own teams. It will take them some time to acclimate to our company and to start recruiting key members of the team. I want to scale up our lead generation, so I will focus on building our marketing team first. We have two salespeople who need more leads. Once it looks like this engine is working, the next focus will be the VP of Sales who will build out the team. In the next 12 months as we scale our teams from 2 marketing people to 8 and the sales team to 7. We also have key product to ship, so we are looking for a lead engineer after this but will be hiring a front end and back end engineer in the next 3 months.
Until this happens we will not be ramping up our marketing spend. Our burn rate will stay relatively similar to what it is now for the next four months.
From then on we will take it from $60K up to around $120k pm. If we see a lot of traction, we may push more heavily on marketing. In any case, we will ensure we get a full 8 months of execution before having to go back to investors and 6 months to ensure we get it done. If we can’t scale our leads from marketing like we think, we will slow things down till we do as our CAC is really critical.”
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