When to Increase Your SaaS Startup's Burn

SaaS startups often find themselves in one of three different states when contemplating their burn rate. The first is the David Farragut strategy. Damn the burn rate, full speed ahead. The second is the conservative approach - attaining profitability using only the cash on the balance sheet. Those two are easy. Circumstances dictate the respective aggression or conservatism. Lots of cash or not so much. The more complicated state is the one in between, and that is the one that most SaaS startup operate within.

You have a SaaS startup. You spent the last 18 months or so building a product on a ramen diet. You might have 6 to 8 employees. A handful of customers are starting to indicate they are willing to pay for the product. Or a content marketing campaign has resulted in a deluge of inbound customer leads.

Or your startup might be a series A company that ostensibly attained product market fit. But it turned out the market for the product wasn’t big enough. Or the fit wasn’t true, a bit of a mirage.

You might be in any other number of situations where you are wondering when is the right time for me to increase my burn rate? After all, the startup has limited cash. If you aim to raise another venture round, you’ll want to invest that cash wisely, when the time is right, to achieve the maximum growth rate possible in the shortest amount of time.

No one can answer the question of when precisely the right time is to begin marketing in earnest or scaling the sales team by hiring account executives and sales development reps. But there are some leading indicators that suggest it could be the right time to invest.

First, customers are pulling you into the market. They are so excited about the product, they are doing unnatural things like accelerating the sales cycles, asking for but ignoring security audits, escalating the decision to the CEO very quickly.

Second, you can clearly articulate a sales process to someone who is unfamiliar with the business because you have done it 10 or 20 or 30 times. There is a pattern to each of these engagements that you have discovered and can now be repeated.

Third, the business is generating enough leads to fill the hopper of an account executive and ensure high quota attainment. Somewhere in the range of 6 to 7 times the quota of the AE.

Fourth, your payback period is quite short. The payback period is the number of months of gross profit required to pay off the cost of customer acquisition. According to PacCrest’s 2016 survey, the median is 18 months. Anything around 12 months indicates that paid acquisition is a very viable channel and merits more investment.

Fifth, there is a substantial amount of competition in the market, and in order to keep up, investment becomes table stakes. Without a significant push, the business risks becoming an also-ran.

This is not a comprehensive list, but a collection of different scenarios that I’ve come across when meeting with founders of SaaS startups. Everyone has a different risk appetite, sense of their market, and ultimate plan for their business. As we’ve seen in profiling lots of different size companies there are almost an infinite number of ways of building an enormous company, from Atlassian to Workday.

If you see some of these signs in your startup, think deeply about whether it’s time to invest more in the company’s growth.

Published 2016-12-16 in SaaS  Management  Financials 

I am partner at Redpoint. I write daily, data-driven blog posts about key questions facing startups. I co-authored the book, Winning with Data. Join more than 20,000 others receiving these blog posts by email.

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