I’m about a year into life as a first-time co-founder of a traditional product-oriented tech company. I’ve done two other services companies, but product companies are different. The one interesting thing about starting a product company is that you will get a wealth of advice from other people. Most of it centers around hiring the right team, building the right product, and making sure there’s a market for what you’re developing. As I talked to more entrepreneurs who had built larger, successful companies, there was one piece of information I regularly received and was not inclined to believe until very recently:
If you are going to do a product-oriented tech startup, it really helps to have at least 12 months of financial runway to cover your expenses and some investment in your ideas before you get started.
I have found it odd that of the many startup articles I’ve read, very few seem to hit on this point. It’s kind of an awkward thing to say – it’s not as if you can’t do a startup without 12 months of runway. And to be clear, there are a number of ways to have at least 12 months of runway, including some of the following:
-Savings and liquid investments
-Proceeds from previous successful ventures
-A spouse or a partner with a stable job that covers your expenses as a couple
-A low-cost, low-burn lifestyle
-You’re in school and someone else is paying your overhead and expenses
I had to hear the point about 12 months of runway from a few folks before I believed it. I think that I, like many others, had the same core reaction when presented with that piece of advice:
1. My ideas are good – it won’t take me 12 months to find a high quality idea to pursue. I found it hard to believe that it would take 12 months to find a good idea. After all, most people who decide to start companies tend to believe that a) they are above average and b) have the ability to spot really good opportunities. How could it take a whole year to find a good idea? Well, you have to think about the process. I can almost guarantee that your first idea will not be what you end up pursuing. I was told this by numerous folks, didn’t believe it, and it turned out to be true. More importantly, you’ll have many ideas that die at different points. Some will get killed at the concept stage. Some will only get abandoned after you prototype them. Others will make it all of the way to public launch before you decide they’re not worth pursuing. The point is that failure takes time and some of the things you ultimately abandon have to get pretty darned close to being live before you realize they won’t work or you’re not that into them. Even if you can get to a working, interesting product in less than 12 months, budgeting for a year gives you plenty of time to get there.
2. The idea of saving or otherwise acquiring 12 months of personal burn is kind of daunting. When you sit down and budget what you need for a year, the number can be daunting. How do you come up with that kind of cash if you don’t have it? It’s hard. But going through the exercise is really useful. It might turn out that you can only scrape together 6 months of cash. Knowing that is useful – it helps you understand how far you can go and the types of ideas you can pursue before you raise money or seek other types of financing. Whether you need 6, 12, or 18 months of financing, the process of going through a budgeting exercise is really useful and helps sharpen the mind around what you can achieve.
So why does all of this matter? Well, raising money provides you with funds to grow but also comes with a ton of expectations about what you will achieve. A lot of starting up is thrashing about and trying to figure out what it is that you want to build and how you’ll spend money to achieve that goal. Money spent prior to figuring out some sense of product market fit, market size, and growth plan comes at a very high price in normal markets. To the degree that you can figure out the basics on your own (and your co-founders) dime(s), the better the odds that you’ll be able to raise money at a time when you’ve figured out what it is that you’re trying to do and how you’ll spend the money.