Monday, October 11, 2010

When to step on the gas and go for it?

When should you grow the burn rate- add headcount, marketing spend, operating capacity? When should you "go for it?" 

In order to answer the question, let's use the analogy of financial options. Start-ups are very much like financial options. The value of a financial option is a function of two variables, the duration (time to exercise) and the volatility of the underlying security (range of possible values).  Start-ups, therefore, increase in value as a function of extending the time before the cash runs out and being able to define the range of possible outcomes.

An obvious insight is that any CEO would want to maximize the value of both variables. Cash is a finite amount - each dollar spent means you are a dollar closer to running out. Cash is time. Less cash, less time. Less time, less value. Lesson: spend very carefully.

However...the range of outcomes, volatility, requires an answer to the question, "can this be a big company?" Such an answer requires the characterization of market size, revenue potential, strategic value,...  Lesson: spend resources to develop answers to customer demand, market size, financial model, etc.

The art is how much to spend on the latter without unwisely impacting the value of the former. The two variables - volatility and time - therefore can be at odds with each other. The key question is how to balance the two competing variables- preserving capital/cash while also characterizing the opportunity.

When I became CEO of Widgetbox, I was lucky to have significant cash reserves. We did not, however, have a well-understood set of market characteristics - TAM, SAM, financial forecasts, product-market fit, etc.  

We decided that in the face of material uncertainty regarding the "range of possible outcomes" that we would maximize the value of time - ie cash. Widgetbox went through a series of painful headcount reductions. Why headcount? In virtually every start-up, operating expenses are ~70% people. To materially reduce expenses there is really only one lever that matters - you need to reduce heads.

Therefore, "going for it," or not, really means ramping headcount, or not. After we reduced headcount, we more than doubled the amount of time we had before the cash ran out.  The extra time allowed us many cycles to iterate towards a well-defined business model, and, importantly, it also allowed for the serendipity required to get to the all important a-ha moments.

During our period of austerity - very low burn rates- I was often encouraged to increase spending - hire more people, invest more in the business. I was told, quite rightly, that you cannot save your way to a big company. One of my mentors insisted that I "find out quickly" if we had a business and that the "go slow" model would only lead to death by a thousand cuts.  I fought that advice and deep down I knew that to spend money without a clear sense of return would be folly.

The serendipity moment came in July 2009. We were able to pivot our technology to meet the market's demand for display ad innovation. The pivot enabled us to define an addressable market - display ($8bn), a clear customer segment (tier one publishers), a business model (CPM), a go-to-market model (direct sales and service), and a product direction. The uncertainty peeled away to reveal a very well-characterized market. As we reached product-market fit the demand began to outstrip our modest headcount.  Each day, a new deal demanded we work harder and we began to see clear bottlenecks emerge - in sales, service, product -that were limiting our ability to grow.

We were no longer projecting/testing a value prop onto a skeptical market, but rather the market began to pull us along. 

Now, each dollar we did not invest was a lost dollar of business, or more.  Now, "saving" money was costing us business.  The team was buried - working ungodly hours - and customers wanted more from us.

We decided to "go for it" and have now grown headcount by ~50% in the last three months.

In summary - preserve cash and extend the duration of your company as the primary goal UNTIL a real product market reveals itself, customer demand spikes well beyond the capacity of the organization to serve it, and you know in your gut that it's time to go "all in."


  1. Congratulations, Will! And kudos to you for sticking by your guns. Great post, thanks for sharing.

  2. Thank you Joe. The post struck a nerve - fun to share as we all work out how to grow our businesses.

  3. Thanks Will. This is a great post.