Your first job as an early stage startup founder is to get your first customer. Your second job is to stay alive so you can get the next one.

Blowing Money Fast

So you’ve raised your first round of funding, huh? It’s tempting to see all that cash in a previously empty bank account and start spending money on everything you wanted before you got startup-rich.

I’ve always kept my personal burn low because it allows me to do what I want to do, not what I have to do.

Capital efficiency is freedom.

For some startups¹, capital efficiency can mean the difference between being able to negotiate your next round of investment from a position of strength versus needing to accept terms that are less favorable than you want so that you don’t run out of money.

In the early days of your startup, you should be using money to build a lean, mean, product building and selling machine. What you spend money on is just as important as how much.

Is your monthly burn helping you build faster/better or fueling growth?

No investor wants you to cut costs to the point that you slow growth and can’t reach important milestones. But being efficient with capital means being smart about how and where the money is being spent.

Here are some of the wrong things I’ve seen early stage companies spending money on:

• An expensive PR agency before you’ve even found product-market fit
• Being top-heavy on well-paid ‘executives’ — staff who aren’t engineering or front line sales
• Paying market rate salaries instead of off-setting lower cash compensation with equity
• A marketing agency who manages your customer acquisition spend…and that growth knowledge leaves when they do
• Expensive outsourced tech teams that don’t live in-house

It’s really hard for an early stage investor — VC or angel — to invest in those companies. I’ve met founders where I’ve liked the team and product, but when I find out what they’re burning capital on and how much, they become a much less attractive investment.

Burn Baby Burn

The first step to being capital efficient is to understand and constantly track your burn rate and runway. Here is a simple way of thinking about burn rate and runway.

burn rate: the amount of money your startup spends every month

If you spend $60,000 per month and your startup’s monthly revenue is $10,000 per month, then your monthly burn rate is $50,000.²  [MonthlySpend-Revenue=(Net)Burn]

runway: The number of months of cash you have in the bank before you run out of money (at the current burn rate)

If you have $500,000 left in the bank and your monthly burn rate is $50,000, then you have 10 months of runway. [Cash in Bank/Monthly Burn=Runway]

Burn rate and runway are important because it helps you (and your investors) understand the health of your business and most importantly — when you’ll run out of cash, how quickly you need to start raising your next round of funding, and whether you have the metrics to do so.

You should be keeping your investors constantly informed on your burn rate and runway. These are the numbers I want to see in a regular update email — even if it’s bad. The amount of help you can get when you have 6 months of runway is very different than if you don’t raise a flag until you have 2 months of runway.

I’m naturally drawn to founders who have managed to build product and find their first customers with limited resources. If you can build something and show early wins without having raised a lot of money and you can keep that same capital efficient energy, you’ll be better positioned once you do raise money.

But whether you raise venture capital or not, you have only one job…to not die.

¹For the purposes of this post, I’m specifically talking about to startups who have shipped early product and raised an initial round of funding, but probably haven’t yet found product-market fit.

²I chose these numbers to keep the math simple, but it opens up the question: is this an acceptable burn rate? It depends. It depends on what you’re trying to do, the type of company you want to have, how much you want to rely on venture capital, and how expensive that capital is. If I saw a company with this burn rate to revenue ratio, it’s a conversation opener. I’d have a lot of questions around where the money is being spent, when you started booking revenue, what kind of revenue this is, and what the MoM revenue growth has been.

Finally, my friend, Mike Sigal, does a great talk on not running out of money — You’ve Raised Money, Now Don’t Run Out of It (SlideShare)

The most important tool to finding product-market fit is in your hand right now and a lot of founders are too scared to use it.

Pick up the phone and call your customers.

It seems obvious, but every single time I suggest it to founders, they act like I just told them to remove their own liver and serve it to me with some fava beans and a nice Chianti.

Our churn is really high and we can’t figure out why people are cancelling. Have you picked up the phone and asked them?

We do an exit survey and ask them to select the reason why they’re cancelling. Not good enough.

We don’t have their phone numbers. Ask for it.

Talking to customers on the phone makes me uncomfortable. Get over it.

Maybe we should just put together a focus group. Nice try. Call ’em.

Calling your customers isn’t just for early-stage startups.

This can also be applied to companies who have found product-market fit in one product line but are trying to launch something new.

Last year, I interviewed Jennifer Hyman, CEO and co-founder of Rent the Runway, and she talked about decreasing churn in an early version of the Unlimited product line — a clothing subscription  service — and discovering that women didn’t want to use Unlimited for jewelry and special occasion dresses, they wanted “to go to work”.

That revelation was a founder’s ah-ha moment that the product that they were delivering to customers was different than the one they wanted.

At that time, Rent the Runway had a $500M valuation. If she can pick up the phone and call customers, you should be able to also.

Jennifer Hyman talks about about the Unlimited story in this Project Entrepreneur podcast (the section about calling customers as a path to iteration starts at minute 14:15).

You can’t get to product-market fit without information

Most startups already do post-cancellation surveys and/or feedback forms. This is the right way to collect customer exit feedback at scale.

Credit: Good End-of-Customer-Life Experiences, with MailChimp’s Cancellation Flow

Single-question cancellation surveys provide very broad data about cancellation reasons but don’t allow your customers to give more specific and granular information. Completion rates are often low because most customers don’t want to be rude and don’t have any incentive to provide real feedback when they’ve already decided to cancel your service.

But when you’re trying to understand why a product isn’t working or churn is high, you’re going to have to do a few things that don’t scale. 

You can’t get to product-market fit without information

The first rule of getting customers to pick up the phone and give you their time is to make the email short and the ask easy. The customer doesn’t want to know the full story of your startup and vision (they don’t care as much as you do) and your only goal with this email is to get them to agree to a phone call.

Here’s an sample email you can send:

Hi <CustomerName> —

I’m the founder of <ReallyDopeStartup.io> and I noticed that you just cancelled. I’m trying to make this product better for my customers and I would like to ask you a few questions.

I promise this won’t be a sales call. Can you give me 5-10 minutes of your time for a phone call this week?

Thanks in advance,

Jane Founder

You should be prepared for some level of unresponsiveness to these emails, but when you do get customers to agree to a phone call, here is how you should approach that conversation:

Don’t be defensive

You are probably going to hear some tough comments about your startup. They might tell you that your baby is ugly and over-priced to boot.

This isn’t the time for you to be defensive or hit #beastmode and turn into a high-pressure salesperson to get them to come back. Don’t get focused on the short-term goal of recapturing lost sales.

You want this honest feedback so that you can make your product better for the long-term.

Ask good questions

Binary questions are rarely good or capturing clear feedback. You need more granular data so that you can understand what lies behind the ‘yes’ or ‘no’.

Here are some questions that you can use to jumpstart your own thinking around these customer interviews:

• What made you cancel?
• What did you initially want when you purchased <ProductName>?
• How will you get this done now?
• Will you be using a different product? Which one?
• Is this something you would pay for?
• At what price would this be valuable to you?
• What is one thing we could do to make <ProductName> better for you?

Do it again​​​​​​​

You can’t do this just once and then run off and make changes to your product based on a single point of feedback. You have to do these interviews enough times to develop a reasonable sample size. As you have more conversations with customers, you should start to spot commonalities  in their feedback.

The feedback will uncover common themes of things your customers want, things they don’t like about your product, and things they wish were different. Collecting this kind of intel will help you prioritize changes and even inform broad shifts in product direction.

So go pick up the phone and call a customer.  And while you’re at it…call your mom.

Photo credit: Beyonce — Why Don’t You Love Me?