Matt Hulett's post
about low water marks for startups provoked some pondering for me. My
metric was always twelve months, but there are different
considerations for a going concern versus a startup.
For the going concern (i.e., a business whose goal is to operate
profitably and grow organically), reserves on the order of full
operational expenses for two or three full sales cycles is reasonable.
(This strongly depends on the complexity of the product and the deal
size.) I'm defining a sales cycle as the length of time between when a
piece of marketing hits a prospect to the time the money from that
prospect (now customer) hits the bank. Failure to acknowledge the full
cycle will kill you if you're on the razor's edge. For example, it's a
reasonable three months from a signed deal to a signed check —
close the sale, a month to deliver, a month for the customer to pay, a
month for your AR to hound their AP, and you're ninety days from
dotted line to dollars. Three sales cycles gives the business enough
time to adjust to significant external events (most recent reasonable
example would be 9/11), to respond to the entry of new competitors
into the market, or to launch new products or extensions.
For the startup (i.e., a business whose profitability depends on
significant growth and attendant capital consumption), reserves of
twelve months is running on the metal. The business needs to be
executing to its goals as the funding search is happening and then
continue to execute as the funding process completes. (Ongoing
execution is more important for later stage companies, as investors
don't expect it from early stage companies.) A good rule of thumb is
that reserves should account for hitting goals sufficient (on a
hypothetical level) for the next round of investment, plus a margin of
error for unforeseen issues, plus six months of runway to get funding
done.
In either case, interim milestones at fixed dates and specific,
measurable goals are essential. Are the initial stages or the
marketing and sales pipeline working? Is product development on
schedule? Is hiring and retention running to plan? Are your partners
coming through? Is the investment climate or business climate
changing? This is one situation where it's good to be a little
obsessive — cobble together a simple dashboard and mark progress
to plan no less than weekly. (The dashboard task has gotten simpler
over the years; these days that can be a combination of QuickBooks,
Google Analytics, SalesForce.com, and something like Jira or Rally for
tracking product progress.) Make yourself accountable (e.g., to your
management team and to your board) and hold your management team
accountable for their individual goals because failure for one is
failure for all when cash is a constraint.