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Tuesday, October 20, 2020

How startups should budget in uncertain times 

I was the archetypal startup CEO: I paused my degree at Stanford to start a company, and after it failed I found myself needing to preserve cash to make student loan payments.

With an old Nissan Sentra and roommates in Menlo Park, my biggest variable cost was food. So it was ramen every night. On a good week, I might have had some sushi on Friday night and if I’d managed to come in under budget somehow (someone’s parents bought dinner) I could maybe splurge again on Saturday with friends.

My guiding principle at this time is surely familiar: Control burn until income streams are more predictable. Many startups find themselves in a similar position these days: ramen or sushi?

Some businesses are thriving during COVID-19 times, but will it last? Take online learning tools: Everybody needs online learning at the moment. When in-person reopens, probably some amount of learning will stay online since we all learned how to do it, but likely not 100%. Worse than not knowing what the percentage will be is the constant variation across geography, segment and vertical. It’s not that different from the current situation for me in San Francisco: If I want to find somewhere to buy ramen or sushi, I first have to check which spots are even open before navigating their constantly changing hours and menus.

Startup budgeting looks a bit like that now. Key assumptions we used for planning — already prone to some variation in a startup — are more volatile. Conversion rate from MQL to SQL, how many decision-makers need to approve a contract, leads generated per event (and what is an event these days), net renewal rates — these factors are all changing and they’re changing differently by customer segment, by geography and by product category. The new normal is highly dynamic.

Navigate through the uncertainty (and reevaluate quarterly)

How can we budget through this? Everyone replanned in April. Plan for a similar cycle every quarter. “Are we at a new normal? How do we know? Do we feel confident about that?”

In addition to the usual factors companies use to make predictions on metrics — things like growth rate and conversion rate — now we also have to consider a variety of outside factors: How the current cycle has impacted customers and prospects, how they’re readjusting budgets and their approach to unpredictability over the coming months. It might look like a new normal is establishing, but COVID flare-ups could happen again causing lockdowns, the U.S. is in an election cycle and there are prospects of further government intervention.

Here’s a recipe for deciding what to cook or whether you can go out:

Set assumptions and analyze, then reset on a regular and irregular cadence

Visit your budget each quarter. AND any month that burn falls outside of expectations, make adjustments.

We recommend quarterly because sales cycles tend to be longer than a few weeks so it’s hard to get data back and make adjustments after only two to three weeks. Here are the key inputs you should monitor:

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