How to lower your cash burn rate if you’re a software startup?

November 11, 2014

Startups face an almost daily challenge: how to carefully manage cash flow while delivering on promises to employees, investors, and customers? For many young companies, success seems to be all about managing burn rate. Outsourcing software development in the first stages of the business can accelerate time-to-market, enable greater agility (recruiting, human resources, etc.), help write product specs to handle scale, and lower cash burn rates significantly.

In recent weeks, startup cash burn rates have been the subject of extensive analysis, from Mark Suster to Marc Andreessen, to Bill Gurley (covered on the Wall Street Journal and on Business Insider) and even the BBC have run articles on the topic. I even came across a quiz from Joe Floyd at TechCrunch: “How to tell if you’re burning money too fast”.

The reality is, if you need to answer a five-question quiz in order to assess if you’re burning too much cash, what you need is a financial advisor and some KPIs to measure your development progress. Rather than taking a quiz, or lamenting about your situation after reading each post about burn rates, you could actually do something about it – starting with your development team.

To start, let’s define burn rate as negative cash flow—like when your payroll is $100,000 and you’re selling only $20,000 a month. Or, as Investopedia defines it, burn rate is “The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations.”

The rule of thumb is that you need at least 18 months of cash to survive, if you’re growing. If you have 18 months of cash and you’re not selling, then your management team should lock itself in a room and figure out why your solution is not moving off the shelves, and why someone was crazy enough to give you money for what appears to be an unsellable product. But what if you had some initial traction, but a competitor came up with a superior solution and you have only eight months of cash left Now that’s a tricky situation.

Hiring a nearshore software development company that has done startup software development for early stage and growth companies, like Wovenware, is one simple and practical solution for this problem. This is because outsourcing is generally less expensive, both in terms of actual cost and in terms of opportunity cost when you look at how to allocate your teams’ time.

Thing is that you might have raised enough money, but you lack the right developers and designers and recruiting these days is not an easy task. Even if you have a team, you might be missing out on certain critical skills that will take your product and your company forward. An external software development firm can help you quickly get to a minimum viable product and start getting clients, while you recruit your team. In other instances, we just help software companies through peak times.

Just recently, we were hired by a software development company to develop the software they sell to other companies from scratch. The company threw out its old solution and worked with Wovenware to develop a brand new solution that met their customers’ current needs. Our client both lowered payroll expenses and avoided unnecessary costs associated with recruitment, hiring/layoffs after the peak load, etc. The company lowered its cash burn and used the difference for business development. The client also had product specs written down so future internal staff can easily make upgrades to the platform. Another example is the work we did with BGenerus. Check out our case study on the project.

Example:

Let’s say you currently have seven employees in your company, and $1,000,000 in your bank account. You’re average salary is $75,000, and you pay 18 percent in payroll taxes and benefits. You know that you’re stretching the team, but you cannot afford to hire the six additional employees that can take the product to the level your clients need it to be. You know you need them, but you just can’t hire them, if you know that you only need them for three months and you want to preserve cash for business development. By hiring a startup software development firm like Wovenware you can stretch the deadline by six months—a lifetime in startup years.

Burn Rates - Buying v. LeasingIf you’re cash strapped, need to pivot or upgrade your software development team (temporarily) and could use the help of a team with experience helping startups launch new products, send me an email: mmoreda@wovenware.com. Also, if you wish to review the Excel I used to analyze the cost of “Buying versus Leasing- Burn Rates”, send me an email. We can help you draw a map of your journey, help you save some cash, and give us the opportunity to enjoy the thrill of launching a new product with you.

 

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