» Low Water Marks #

Paul R. Brown @ 2008-08-06

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.


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