Burn Rates: How Much?
In the comments to last week's Burn Rate post, I was asked to share some burn rates from our portfolio. I can't do that. But an alternative suggestion was to write a post suggesting some reasonable burn rates at different stages. I can do that and so that's the topic of today's post.
The following applies to software based businesses, and most particularly web and mobile software businesses. It does not apply to hardware, life sciences, and energy startups. It is also focused on startups in the US. It costs less to employ teams in many other parts of the world.
Building Product Stage – I would strongly recommend keeping the monthly burn below $50k per month at this stage. Most MVPs can be built by a team of three or four engineers, a product manager, and a designer. That's about $50k/month when you add in rent and other costs. I've seen teams take that number a bit higher, like to $75k/month. But once you get into that range, you are starting to burn cash faster than you should in this stage.
Building Usage Stage – I would recommend keeping the monthly burn below $100k per month at this stage. This is the stage after release, when you are focused in iterating the product, scaling the system for more users, and marketing the product to new users. This can be done by the same team that built the product with a few more engineers, a community manager, and maybe a few more dollars for this and that.
Building The Business Stage – This is when you've determined that your product market fit has been obtained and you now want to build a business around the product or service. You start to hire a management team, a revenue focused team, and some finance people. This is the time when you are investing in the team that will help you bring in revenues and eventually profits. I would recommend keeping the burn below $250k per month at this stage.
A good rule of thumb is multiply the number of people on the team by $10k to get the monthly burn. That is not the number you pay an employee. That is the "fully burdended" cost of a person including rent and other related costs. So if you use that mutiplier, my suggested team sizes are 5, 10, and 25 respectively for the three development stages listed above.
Once you get the business profitable, you can scale the team larger and larger to meet the needs of the business. I don't think of that kind of expense as "burn rate", I think of it as "scaling the team." I believe you want to use a bottoms up budgeting process to determine your headcount needs at this stage of the business.
One final caveat – there are outliers. Twitter had a higher burn rate than I am recommending during the second stage due to the massive scaling costs they encountered. And Facebook had a higher burn rate during the building the business stage due to the size of the revenue team that they assembled and other needs of the business. There are some business opportunities that are large enough that they can justify (and fund) larger burn rates. The mistake we all make is assuming that many of our companies are outliers. There are very few companies that can justify a million dollar/month burn rate or larger. There are many more that thought they could and are no longer around.
Would you be able to add time to each stage? Typically how long does each stage last in companies you have invested in please?
too long!but seriously, it takes as long as it takes. there is no easy rule for time.
At the time of agreeing an investment with a team is a timetable of development and progress agreed (tentative to firm)? The burn rate equation has cash on one side and time (the clock is ticking) on the other. How is the size of the investment decided when time to progress is difficult to determine? I agree, it is difficult to know when a company and product will progress from stage to stage. Is it your wealth of experience combined with a gut feeling/ hunch?
rules of thumb:six months to nine months for the first stage12 to 18 months for the next two stages
If I can’t hit my targets and need several more months in [stage two] do I keep the current burn rate and take another capital injection in stride? Or do I need to scale back until I can hit the next stage? I know it is dependent on the situation, but any general insight?
i’d lean towards scaling back.you can only go to the feed window a few timesthe feed window is different from the pay windowJLM can explain the difference
I’m averaging the length of each stage to the mid point.Stage 1 7 1/2 m’ths at $50k pcm max = $375,000Stage 2 15 m’ths at $100k pcm max = $1.5 MStage 3 15 m’ths at $250k pcm max = $3.75 MTotal = $5.625 M for 3 years 1 1/2 months.Say $5.5 M in total for three years of team work. So at that point does income begin to exceed expenditure?
i like $600k, $1.8mm, $4mmgives some cushion
Interesting seeing your and Freds numbers below for ballparks.
I am genuinely surprised that stage 1 would need to be financed at the ‘high’ level of somewhere between $375k and $600k for 6 to 9 months of work. Location is a significant cost variable, but I’m open to the view that the majority of entrants might expect to have, and even want, to scrap, beg, borrow, and steal their way to an MVP for quite a bit less. I might even think that it’s the sign of an entrepreneur/ alchemist with real talent who can do this, turning water to wine, base metal to gold. The estimates for the second and third stages are less surprising to me.
COST OF TEAM WILLING TO WORK FOR NOTHING AT FIRST IS HAVE TO REPLACE THEM WITH TEAM THAT ACTUALLY HAVE SKILLS LATER.
“COST OF TEAM WILLING TO WORK FOR NOTHING AT FIRST IS HAVE TO REPLACE THEM WITH TEAM THAT ACTUALLY HAVE SKILLS LATER” – FAKE GRIMLOCK.Has someone hacked GRIMLOCK’s account? This is grammar 🙂
Many teams aren’t at the first stage until they already have some traction and viable product. The pre-stage1 or stage 0 is the years of working for free the founders have to put in.
There is negotiation of runway based on a number of factors. Early traction, past experience, market, and competition from other investors can’t be ignored either. But the investment stages fall withing a comfortable range for web startups 500k-1mil seed, Series A is larger, etc.The smartest founders I read suggest building the business first (even if it takes longer) and then seeking investment later after it’s proven successful and has a strong growth trajectory. You can see examples of this with StackExchange and DuckDuckGo.
stack and duck were “well played” as JLM would saythat’s a great model if you can do it
Hi Fred, what do you usually budget for a founders salary?
whatever they need to sustain themselves and their family
Less than that breeds stress and distraction.
”Some things just take time..9 women can’t make a baby in a month”..comes to mind.. 😉
It’s in danger of becoming the AVC strapline 🙂
Just wondering how much the designer and engineers burn individually. Your math is done with SF numbers or? I’m from Portugal, so I would like to compare our different realities
US numbers. NYC, Boston, SF, LA, Seattle, Boulder, Austin, Chicago, etc, etc use $10k per person fully burdened
Thx Fred, yep we’re in really, really different realities.
I have been programed recently to think of MVP from the lean / bootstrapping perspective with very minimal burn rate. I think of @FakeGrimlock:disqus sitting at home at night creating his MVP for the cost of time lost not playing Minecraft or a couple of kids coming up with a working alpha while living at home.It is obviously very dependent on the product, team and many circumstances, but thinking lean does not play nicely with a $600k / year (annualized) burn rate to build a product may or may not find a market fit. But I guess that is what angel and early stage funding is all about.
if you can do any of these stages for less, then by all means do it!!
working on it as we speak
Hey Fred,What other blogs do you read?Curtis Sumpter
Click on Fred’s face on Disqus and you’ll see a list. 🙂 Those are the ones he comments on. It’s a start.
i try to read every awesome post on the web every dayi do that by reading posts instead of blogs
How do you find these posts?
twitter, reddit, hacker news, etc, etc, etc, etcpeople find them for me
May I quote this comment in my pitch deck? I’m building something that I believe will nail this problem for good, and your sentiment is a perfect example of my value proposition.
yes, of coursegood lucki’ve seen hundreds of startups tackle this problem and not one of them has solved it
Have you read the Eric Ries book?
It’s actually next on my list, but I am very familiar with Eric Ries and the concepts
Reading it now. Also reading Steve Jobs at same time – beauty of eReaders.
Steve jobs by Isaacson – top class
I dont see lean/MVP *necessarily* correlating to minimal burn rate. I see it equating to minimal wastage and optimised bang per buck.Being lean is more about the speed and efficiency you can iterate through the Build/Measure/Learn feedback loop and not so much the actual $ cost of doing so.
It’s a great point and I agree. I don’t want to confuse lean and bootstrapped, because there are very significant differences. But you are right.. lean is all about the iteration process, not the cost.If it takes you 10 cans of beans or $1 million, both could be equally as lean depending on the situation.
It doesn’t really matter whether its bootstrapped or outside funded. That really just a funding issue.The issue is how much do you spend to see if the idea works. That’s where the issue of lean comes in.
So true. Exactly the point I was fumbling to try to get across. It is a funding issue.
KEY PART OF LEAN STARTUP IS MONETIZE FROM BEGINNING.IF DO RIGHT, IT PAY FOR SELF.
Not necessarily. Keys to lean is to have A) Product Market Fit and B) isolated an Engine of growth that is sustainable. ROI positive business requires revenue, compounding business model probably does, but viral does not.
ME NOT SURE ERIC RIES AGREE. http://www.startuplessonsle…
I certainly can’t speak for Eric. But, I think that he would. Read the book, page 209 “The Three Engines of Growth.” Specifically, reference the section on the Viral Engine of Growth on 212. The key is the creation of value. The example in the book is that Facebook and Hotmail could have charged for their service, generating money, but that would have impeded their growth. And that growing their user base created more value than charging for the service.Twitter is a good example of this as well.The best scenario is to find a business model where you can generate revenue natively in the app and have a viral coefficient above 1, that is nirvana. But it is not required in order to be lean in my opinion. I think the need to monetize early on and to self sustain is more closely associated with Bootstrapping.Product Market Fit and Engine of Growth are part of validated learning. Eric talks a lot about new metrics for startups that focus on these outcomes.
ME, GRIMLOCK, SAY “NIRVANA” IS MINIMUM VIABLE STRATEGY.
While monetizing from Day 1 is awesome (and something I’m working on myself), it is not always absolutely necessary. There are big data startups that exponentially gain in value as the network effects start kicking in and that data becomes unbelievable valuable — Billguard is one of my favorite examples of this.The big problem with not monetizing from Day 1 is two fold:1) Startups have been lead to think that they can build a social network that will find and justify ridiculous valuations because of FB, Twitter, LinkedIn, etc. In most cases, these startups will remain in the 99% and expect the hard work of others to carry them along for the ride.2) Startups (and some investors) are banking on a “next round of financing” as part of the plan when closing a current round. If you are taking money (or investing in a round) only as a bridge to buy time before the next round, you are setting yourself up for disaster.So to make things simple, you either (a) build something that people are willing to pay for right from the beginning or (b) hope that you are able to find that golden egg laying goose before the funding runway hits zero.
I think there is a new stage in the startup world – the “demo” stage. If you look at what’s being created at startup weekends and hackathons and such, there is no reason you can’t put together the roughest of demos in a matter of weeks for less that say $10K (depending on your own technical abilities).At this stage almost everything is free: hosting, APIs, open source frameworks, version control.The difference between a demo and MVP is that a demo is not ready for consumer use. But the demo can go a long way toward proving a concept and even some market fit with a few dozen testers. Then you can raise the $600K to actually launch something.
Absolutely. At some of the last few hackathons I have seen / been a part of, there have been demos that are almost user ready after just a weekend. It is very impressive stuff.But I have also seen a lot of teams raising money w/o a real demo / proof of concept, which is just crazy. This leads to some very uncomfortable investor meetings when things don’t go right and the team wants to try something new.
Lean does not equate to low burn, it equates to low waste. 5 people, getting out of the building, talking to customers, creating product that tests market hypothesises is perfect lean.You are describing bootstrapping. Something that can go along with Lean, is also a great idea, but that does not necessarily translate into Lean. If Bootstrapping causes you to take so long from a calendar perspective that you don’t ship product and learn then you are creating waste.
NEVER UNDERESTIMATE COST OF NOT PLAY MINECRAFT. ‘<
For some things in this world, there are no price tags that do them justice 🙂
For the 10k burn rate, is that split 60k/year salary or 80k based on your experience with other costs (insurance, rent, fat Internet pipes, heat/ac, moleskine notebooks).
somewhere in that range.
No start up should buy moleskin notebooks.Designer brands are not lean.
Insert your favorite whiteboard or notebook Erik. As long as your pound wise and penny foolish lean works.
no they buy iPads instead Erik 😉
Perhaps reaching out to influencers requires a little touch of ‘class’ though from time to time. Schmoozing helps. In-house should be free of moles…of all kinds.
Are apple desktop/laptop/devices designer brands?
Super helpful.As you get to stage 3 of your model, I’m guessing $10K per goes up as those types of individuals are more expensive even with equity.
yes, but you also have some less expensive team members at that stage too
True…and sales people can be paid on revenue %.
my strategy: do everything.been a professional programmer (for a short time), did business etc at school, worked for an infrastructure company, done technical support, did marketing for years, ran a web design company/client work.want to improve my technical and design skills so i can scale and not have to learn too much whilst doing it.would also enjoy running both the technical and design team. and overseeing marketing.probably a bit fanatical, but if you want to get something done…
Being a CEO is really hard. It helps to have some focus on that too. (I am assuming the genesis of your post are your feelings about wanting to continue to be able to start businesses as cost effectively as possible).
that, and having control over product.
Chris – I have worked with more than one founder who wore too many hats. And a seasoned third party investor will either directly address or not invest, when they sense a big vision led by a founder with control issues.You need to know what is critical and what is not; and maybe what you are world class at and what you are not (its true, you may not be world class at design, tech & marketing! ;-)Eventually,unless your goal is not to build a large business, your main job will be to recruit and lead the team that does all the things you just laid out. If they cannot meaningfully contribute they are either weak or soon to be gone.Despite al the Steve Jobs ‘taste’ discussion blasting about, Apple is run on a ‘right answer wins basis’ (which is why services is such a struggle for them, as it does not fit that model). That’s a cultural model, not a leadership modeCEO is not a gig for everyone.
good points.i’m definitely not world class at any of the three. if i continue doing what i’m doing i’ll rack up, the supposed, 10,000 hour in all three, though. not that that automatically makes world class.i am talking about leading the teams, rather than execution. not that i mind execution, but obviously one person can only produce so much a day. at the moment it’s good that i’m doing all these things, as soon it’s clear it’s not, i’ll stop. but i won’t stop just because it’s the “way it should be”.i want to test it out. with the right market, right skills, it would be interesting to see.
I used to totally subscribe to this – but i won’t stop just because it’s the “way it should be”.I have learned that it is worth investigating why things ‘should be’ a certain way.And I don’t do startup work because it is interesting, anymore.Just food for thought…..
And I don’t do startup work because it is interesting, anymore.i hate it sometimes. but then, sometimes, in the beauty of the machine you see the world in a new way. unlocking potential. in our use of twitter, facebook, google, we become more than we were before. more informed, more popular, more knowledgeable. doing startup work allows us to define our own ‘more’.
Good Comment James, it makes me recall a past post from Fred on the job of the CEO:- Set Vision- Recruit and retain best team- Make sure there is enough cash in the bank.Notice how do everything is not on the list. 🙂
Chris,Listen to James! The biggest failure for start ups and small companies is that the CEO saw himself as “THE MAN.” He believed nothing got done unless he did it, nothing was right unless he did it, and basically employees were an inconvenient expense.THAT is a sure way to struggle, put in lots of hours and effort, and in the end to fail.You need to find people, and yes, they will cost you money and will demand to be respected, that will force YOU to become better rather than surrounding yourself with people that hold you back.
HELP OTHERS BE AWESOME FIRST IS BE MOST AWESOME OF ALL. #HERONOTEGO
EXPERT IS BEST AT DO THING. LEADER IS BEST AT HIRE EXPERTS.
EXPERT NO GOOD. EXPERT COMPLICATED. LEADER MAKE GOOD VISION. HIRE PASSION SMARTIES. HIRE HACKER. THEN NO SLEEP ONLY PASSION+HACK FOR 6 MONTH
experts know. leaders guess. hackers blindly build for the sake of building. too many hackers are just spinning their wheels, spending time away from loved ones building more photo uploaders and messaging systems. that does not sound smart to me.
That would be a true waste of time. The best leaders see a problem that needs to be solved and can find a single or a group of hackers that can efficiently build a solution. They then work together to test ideas, iterate, and find their way past the building product stage into the building usage stage. The leader (CEO) finds more people to help build, tell the story, make it pretty etc. The hackers keep putting in better and better solutions and the cycle continues.
GRIMLOCK has a groupie
i guess so
experts know what they are doing. leaders do not.
The problem with this Chris, is that you don’t scale.
Just redid some figures today for our next six months of “building usage” burn rates, and they look more in line with your “build product” burn rates. Thats a good thing 🙂
As charlie sheen would say, “#winning”
#winning like a rat, don’t remember the last time I bought a new piece of clothing!
Charlie Sheen?!?He’s that outsider from LA. Here at Cheers, we #win with @andyswan:disqus 😉
my bad. i’m sorry about that breach of protocol 🙂
What have you learned from the mistakes made by the ones that thought they could ramp-up to $1m/month but didn’t take off.
I guess he has developed lots of ‘good judgment”… haha’Success comes good judgment. Good judgment comes from experience. Experience comes from bad judgment.’
More people doesn’t always mean more progress against goals
And the money eventually gets paid back (one way or the other) so when you waste it you have to remember its not just OPM (other peoples money) its yours.That’s one of the biggest disconnects I see between Entrepreneurs and VC’s. Somehow when its VC money Entrepreneurs see spending it differently than if it was their own.
This is so often the issue – confusing all kinds of actions for progress.
DO LESS BETTER ALWAYS BETTER THAN JUST DO MORE.
IF FIRST 5 DEVS FAIL, ADD 10 MORE JUST 10X FAIL. #ONLYSCALESUCCESS
adding more people to a late project makes it laterhttp://en.wikipedia.org/wik…
Then it’s straightforward to recalculate your burn rate in cheaper locations. The development burn rate can be cut by 1/4 in the first stage.I am not talking about outsourcing, just building part of your own initial team and increase your investment potential.
Interesting, this.I’m guessing the toughest battle to fight is a ‘positive illusion’ problem i.e. the problem you mentioned at the end. We all think we are above average and are obviously looking at most things through our very biased lens. And we all think we have 50 billion dollar opportunities!Until, of course, the bubble bursts. Rather that happens early than late though.
the market is awesome. it’s good to be in it as much as possible; blogging, running a business, whatever. it quickly wipes away non-reality. it’s your friend; even if it does beat your ass occasionally.
Until, of course, the bubble bursts. Rather that happens early than late thoughit’s good to chuck intellectual property out there, and see how it does. it’s all disposable.i’ve done a little bit of a blog (which i do anonymously) for about about 20 days and got 22,000 odd visitors (see attached image). i can barely be bothered to back it up — it’s easy to replicate.if something doesn’t work, chuck it out, learn some more, do something else.
Haha. Well done Monsieur Descartes.You seem to know how to play the market.I can never seem to manage it. I always end up discussing/talking about what gets me excited. Opposite approach. I can see yours is very successful.
i write for myself as well. not sure i’ve worked out an approach. just try and do everything technically correct, and then write. may just be a lucky start; we’ll see.
All the best, Chris! Do let me know if I can help in any small way.This blogging thing is great.Has transformed me.
GREAT Follow-up to the Burn Rate post. I very much like the back of the envelop metrics re: team size/stage, $10k/head, months/stage etc – very helpful.Can you provide some simple pre or post money target valuations at these different stages, as well as correlating investment rounds to these stages. Assuming something like;Building Product Stage = pre-seed & seedBuilding Usage Stage = Series A
I’m all about “back of the envelope”I am old school but these are my comfort zonesBuild product – raise 600k at 3mm postBuild usage – raise 1.8mm at 9mm postBuild company – raise 4mm at 20mm postI am not in my comfort zone these days
Have you had people come to you asking for you for rounds back in your comfort zone?
you mean accepting a lower valuation in order to work with USV?
Well I wonder would Mr.Wilson if he were to be an entrepreneur look at the landscape and see what is available make the deal with USV or someone else given the same parameters.Mr.Wilson says he is out of his comfort zone.I feel though that things maybe changing and he maybe be back in his comfort zone in the new year.
i think you are going to wonder about that forever
Yes. I’m not a fan of the insanity.
i think those comfort zones are very acceptable.
What many entrepreneurs don’t understand is that it’s in their interests to be old school too.
This is a really good point. We see this a lot. Most of our investments have at least one conversation with entrepreneurs where we provide our perspective on venture financing. It’s rare to see less experienced entrepreneurs understand the subtleties around down rounds and up rounds and why raising “a larger series A” isn’t necessarily the right thing to do. In our experience over the last 3 years, more of the successful businesses we’ve seen or invested in have raised “just enough series A to fund a quality approach to product market fit without putting undo emotional stress on the founding team.”It sure stinks when we see businesses that raised $2M Series A, created a burn rate commensurate with the raise, didn’t find product-market fit and now stand little to zero chance at a constructive Series B or ever regaining financing momentum + owner equity again.[EDIT: I use ‘Series A’ or ‘Series B’ terms loosely … ]
Yep. My theme was “build a valuation for the long haul” when raising our seed F+F round.As optimistic and confident as we are about our technology and product vision, we’d be stupid to optimize for being right 100% of the time.
I enjoy the “back of the envelope” or “ballpark” comments the most.It takes real knowledge, experience, and most importantly confidence to disclose these, because they are easy for people to poke holes at and say they aren’t sophisticated, but they are really useful.
Incredibly useful. I feel sort of crazy fortunate that I fit well below Fred’s ranges on valuation and burn rate so far. Would have loved to have had this post to validate that nine months ago. 🙂
thanks. i also appreciate your comments for similar reaasons
we did our seed $500k on a convert at a discount to series A. Our series A (hopefully 1st half 2012) will fall right in your range.now thats out the way lets meet 😉
any time that i am free
In hindi there is a word called “jugaad” http://goo.gl/uiFFl it translates into basically working with resource constraints.I find that generally burn rates are also a function of inflexibility in working with resource constraints. Finding out a jugaad should be something that everyone on the team should be willing to accept from day one.If it was not for jugaad the Bell Labs folks would not have created UNIX the way it was, flash forward 20 years later and you have Windows that did not face the same resource constraints and you have what you have.I think doing more with less should be something that a USV should be impressed by especially when you are in that early stage world of proving concepts and building a product. Id accept even lower valuations if the USV’s and the few Mr.Wilson(s) of the world are also in it for the long haul.
Thank you this is very helpful.Based on the burn rates above, this would suggest 12 months, 18 months, and 16 months of runway respectively at each stage.
yup. i was thinking 12, 18, and 18 assuming that it is hard to ramp from $100k of burn to $250k of burn instantly
Really useful post, Fred. Thank you.
“I am not in my comfort zone these days”Makes sense. Don’t be tempted to stray from that. I fly RC Helicopters (great hobby btw.) It’s that last tank where you crash (and have to spend weeks rebuilding). In skiing it’s that last run you shouldn’t have done that you spill. In boating it’s taking ever increasing chances with the weather (all for the juice and excitement). In running it’s chasing a bicycle on the boardwalk and then realizing you pulled a muscle and have to run through pain for the next 6 months.Comfort zone to me is being able to absorb the inevitable unexpected things that always require money in any situation. I rarely analyze things using super precise numbers. I like “hand over fist” which to me means there is enough money in something to cover unexpected things that arise. You find that with LBO’s one missed assumption and the whole thing comes down. Of course you pass on many opportunities and of course the gamblers win many times.Here’s an example the failed Stuyvesant Town deal and this I’ve seen happen frequently in real estate where developers (who sign personally) loose their shirt:http://www.nytimes.com/2010…Summary:”The rental income did not cover the monthly debt service. But the two partners were betting that they could turn a healthy profit over time as they replaced rent-regulated residents with tenants willing to pay higher market-rate rents. But their plan fell apart when they could not convert enough apartments to the higher rents as quickly as they had planned. And in the past two years, average rents in New York have fallen sharply, along with property values.”Key word: “betting”.
If you get to the Chesapeake, you are welcome to come out on the Chesapeake Deadrise anytime.
What type of factors would cause you to lower or raise your post in the “build product” phase?
‘The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing.’ | Albert Einstein–QOTD.. Have a great start to the week guys! 😀
More on the important hiring decisions each of the stages. More on “mistakes to avoid in creating a higher burn rate than usual”. Good post.
Ok, so what are good ways of keeping your burn rate low?
Realize that every dime out of your warchest is like placing a bet. Consider the odds carefully before writing a check.Use equity creatively to pay for things you need.Be smart about when to be cheap and when not to be. Hiring a great engineer vs. a not great engineer may save you $30K and cost you six months in additional burn.
don’t employ VP anything until series B.Like your new pic Shana.
As entrepreneurs, we tend to be pretty optimistic, which is a great thing. But as many wise people have pounded into my head “it always takes longer than you think.”One of my themes when putting together our “build product” financing was “build a valuation for the long haul.” If you leave yourself no room to do that, an exploding cap table can ruin a perfectly good company.
That’s because the second 90% takes multiples more time than the first 90%.
Ha. I was just about to quote the 90-90 project rule as well. 😉
“Under promise and over deliver” applies equally well to business financials. Anticipate expenses somewhat high, and fight like mad to come in way below those numbers. Running out of money, or even running “tight” is brutal and detrimental on many levels, i.e. cap table, morale, opportunity, etc. edit:typo
So true.I haven’t done this perfectly, but then again, that’s why we did a very conservative valuation.My theme was “build a valuation for the long haul” while raising our “build product” round from F+F seed investors.
Ha! This is what I get for commenting pre-coffee. I forgot that I’d already said the thing about my theme for the “build product” round.More coffee, more coffee…
Haha, we just assumed that you really, really meant it!;)
What about using “offshore” to expand budgets in building the business stage?
Offshore is a two-edged sword. Proceed with caution. I’ve seen more than one example of train wreck from looking to save costs by going offshore at the wrong time. Each model is different though.
It’s true about the trains wrecks but I’ve seen just as many here.
That’s true, Tom. Offshore does add an additional layer of management and integration, as well as control issues. I feel it depends upon the product, the team, and the connections (offshore).
makes me nervous. it can work. we have plenty of portfolio companies that have done it. but it still makes me nervous. i love to see a single team working in a single space. i know that’s old school too.
WRITE BAD CODE ALWAYS COST 10X MONEY IT SAVE.
In my admittedly short experience it seems like you pay a premium for talent irrespective of where they are located.
Cash is always king since it can cover a multitude of sins at any stage.
Awesome. I’ll chime in on the stage before this post starts: Building prototype.Get this done. It doesn’t have to be amazing but it does have to show your vision and your capability to get product out the door and the viability of your core team.Even better if you can get people on the product, collect feedback, implement some of it, and take the stuff you can’t pull off yet into the pitch meeting.”You are funding what our potential clients ARE BEGGING FOR.”Also remember: Everything takes longer than you think, and the first round will always be the most expensive so do everything in your power to get as much progress as possible before you need OPM.
good stuff. you are on a roll this week.
Nice Andy.”You are funding what our potential clients ARE BEGGING FOR.”If that doesn’t get your investors excited, you might as well just end the meeting right there because it doesn’t get any better than that.
Thanks a lot Fred for these figures, it helps a lot!
these numbers seem exceedingly high to me. $50k / mo to build a product? that seems like an awful lot. One developer, working alone, should be able to crank out an MVP in less than 3 months. I know because I’ve done it (granted I had to eat my opportunity cost of those 3 months and live off savings…).
Not all products are appropriate to build this way, but there are those that can be built and launched for nothing, coded in one’s spare time, etc. It all depends on the type of product and how it is placed in the marketplace.
it’s great when that happens. doesn’t happen enough.
that’s why i feel so lucky to be a developer. Though I pretend to bill myself by keeping myself accountable.
50k a month?!?!??! maybe it is such in venture world, but if you’re a broke ass fool bootstrapping his/her way, try 5k per founder a month until you have paying customers. if you’re hardcore (translation: desperate broke ass fool), cut that number in half — it’s definitely possible. if your vision is rich and deep, and if you’ve educated yourself (via blogs like this one as well as books) you’ll save yourself a ton of money. these numbers i’ve tossed out are for the purely digital businesses; the web just isn’t capital-intensive anymore, and it’s only getting cheaper (although the pie isn’t nearly as big as some of the billion dollar valuation club would have you believe, as the amount of stuff you have to give away for free is also growing). hardware and other forms of technology are a different story, if you want to spend a lot of money consider playing there. #fs
“if you’re a broke ass fool bootstrapping his/her way, try 5k per founder a month”Um, if you’re a broke ass and you have 5k cash per month sitting around you’re not as broke as you think.
Agreed, although its all relative.
ME, GRIMLOCK, ENDORSE THIS MESSAGE.
I am one of those broke ass fools. When I read 10k/month/body my eyes popped!
Broke ass fools ftw!
I prefer to keep burn rates under $5000/month. But I self finance, am a programmer myself and hire overseas programming talent (full time employees). This is a great model for quickly building profitable businesses that spit cash. I suppose for achieving Facebook / Twitter level greatness you are better off accepting funding and building an American development team.In other news, does anyone else think Fred looks like Buster Olney?
sort of looks like buster olney, although i think that is a bit of a stretch. in my opinion fred’s true celebrity twin is gary sinise.
They at least share a hair stylist and get similar amounts of sleep.
I’ve thought this before. Keep wondering why Fred is on Baseball Tonight.
Ha I wasn’t trying to not be nice. My post was inspired by pure affection for both fred & buster.
oh! i got confused. you said buster olney but i thought of buster posey (baseball player probably fred’s kids age). i agree there is a good resemblance to buster olney.
hat tip to the skins fan
Wow, this is in a way a bit depressing. But as David and others have mentioned at the beginning you can control the burn rate if you are developer and specially if you are using open source. But sooner or later things will get expensive to the levels mentioned. Our servers alone costs us a fair bit. If you guys pardon my shameless plug: Please also visit our Facebook page and “like” it and be one of the first people to use the services of our latest start-up services:https://www.facebook.com/pa…
Great post Fred. I really like posts like this, you are revealing your inside knowledge and experience in the industry.Back of the envelope is a great sanity check and easily good enough for the broad picture.I’d be interested in what the burn rate is when you really scale up (Twitter/Facebook style) just because I’m interested…..the info in this post is what the vast majority of start up entrepreneurs need to know.Does your 10k per month include a schwag line, gotta have schwag no matter how small you are….
Also off topic, older/newer posts, makes much more sense, a good change
that was discussed and determined in the comments!!!
Ah! sorry not been able to be around so much lately
no apologies acceptedwe’ll take whatever you can give
Great back of the envelop numbers for US start-up market , can not resist to summarize here ..Stage Team size Burn Rate funding—————- ————– ————– ——–Building Product 5 $50k/month $600k at 3mm postBuilding Usage 10 $100k/month $1.8 mm at 9mm postBuilding The Business 25 $250k/month $4 mm at 20mm post
i wish it looked like thisi’d be a lot more confident of the returns we can generate to our investors
Excellent Post, as always.
Seems @disqus lost 2 comments that I made today on this post and 1 comment that I made TODAY on yesterday’s post.
I just brought them in from spam. Sorry about that. I dunno why they went there.
it’s a spam filter issue. i am working on it
Got to this a bit late…being part of incepting & building 4 start-up companies from scratch, I totally agree that HW (especially communications) is totally diferent but there are also significant differences between:1. SW Internet vs. Mobile ones, with the latter usually requring much more.2. If you build a local US business vs. a business that is mainly overseas / international (that’s btw one of the challenges being faced in the Israeli hightech arena in almost 100% of the cases).
these posts and comments are all types of awesome. i’m hoping it lowers and/or negates my personal future burn (i.e., grad school tuition) rate.
Fred, just to confirm you are referring to net burn targets at the various stages and not gross burn (i.e. pre-revenue). Correct?
Enjoyed you blog post, too, Kirill. Thanks for the link.
That was a good link. Thanks.
I enjoyed the post, thanks.
Soooo true, Charlie.
Totally agree. One way or another you have to be able to assemble a small team and crank the vision, otherwise its a hobby. I’m old school, but I also like an office, where you come in and work together.
I call it office osmosis. It is an unexplainable, yet extremely critical factor in how the product evolves and the culture is built.
old schoolers unite!