Your job as a CEO: do not run out of money

Basic and yet, not taken seriously

When I joined Techstars, we had a lot of meetings, presentations, and talks with mentors and potential advisors. One presentation from David Mandell struck me. David said in this presentation that a CEO has three jobs:

1. Communicate a vision

2. Hire and fire

3. Do not run out of money

I already wrote before about communicating a vision and hiring and firing. This blog post goes into the last topic: do not run out of money.

Raise enough and burn carefully

When you raise money, plan and estimate how much you need to get product-market fit (e.g., build an MVP and make adjustments). Once you get the number, add between 50% to 100% more to it, which should be your round's target. This margin accounts for all the mistakes you will make while operating the company and building the product. Do not raise more than you need because you would give up too much control too early.

Once you raise your first round, always spend very carefully. Before product-market fit, you should never spend more than $50,000 monthly. At this stage, you only need 3/4 engineers to build the product. Other expenses are likely not required. If you spend over $50,000 on a software company at this stage, reconsider your plans and drastically cut costs to stay under $50,000.

Always have enough runway to allow you to raise your next round. Raising money is hard. You want to be well-positioned before raising another round. Always have enough money in the bank to give you the time to raise funds from the right partners, at the right terms.

Monitor your finances

No money, no company. If you run out of money, you cannot pay employees, contractors, or service providers. For this reason, you must know where your company is at. Like a pilot in an airplane, you need to know how long you can fly before you put more fuel in the engine.

There are a few important indicators to keep monitoring:

• Cash in the bank: money you have in your bank account(s)

• Revenue: the amount of $$$ you collect every month from your product or services

• Spend: money you spend every month. Keep this number below $50,000 before product-market fit.

• Burn: it’s revenue - spend. It represents how much monthly cash you burn to keep the lights on.

• Runway: cash in the bank/burn. It tells you how many months you can keep operating with the same level of revenue. Always ensure you have 6 to 9 months of runway before your next raise.

Example: you have $1,000,000 in the company bank account (cash in the bank). This month, the company spent $70,000 (salaries + expenses). The company had $50,000 in revenue this month. Your burn will be $20,000 ($70,000 - $50,000), and your runway will be 50 months ($1,000,000 / $20,000 - in other words, more than four years).

With a long runway, depending on your stage and traction, you can either:

• reach profitability (revenue > spend)

• accelerate your growth (increase your spending by hiring more but lower your runway)

No matter what, always keep an eye on these metrics. Do not run out of money, and ensure you have enough runway to hit your following milestones and, ultimately, your next financing round.