Building is one of the great joys in life. The sounds of puzzle pieces coming together. The mind or hand calluses building with each iteration. Yet, the actual building is only half the job—maybe even less. Building actually requires so much planning before a hammer hits the first nail.
To illustrate this, let’s say you’re building a house. But instead of sitting down and planning with some blueprints and scheduling, you decide to just wing it. In the beginning the steps appear straightforward and you’ll avoid any major calamities. But at some point the snakes catch up with you and you’ll be hitting unavoidably disastrous situations. Miscalculations of lumber will cause more than too many trips to Home Depot, and you won’t leave enough room for electrical and plumbing, and you may even build a room in the wrong place.
Now, as a software operator I’m sure you see the parallels. We’re all willing something into existence that hasn’t existed before. And while our hands may not be as rugged as a builder, the structures we build require planning and perspective beyond the initial stages. You also need a guide to overcome barriers and obstacles, and basically, help you out of pits that you weren’t aware of that you end up falling into. You need someone like Byron Deeter.
For the past 16 years as a Partner at Bessemer Ventures, he’s counseled a wide selection of companies and individuals through growth and hypergrowth. With the likes of Twilio, ServiceTitan, Canva and many others, his arsenal is well equipped to take on any project. And Byron’s builder advice is yours for free—take a listen or keep reading.
Listen now 🎧
Here we summarize the main takeaways for you to implement or hand off to your team for implementation.
What is burn rate?
Burn rate is the speed at which a company is using up its cash reserves to fund overheads. It indicates how much money a company is losing over a given period of time.
Why is it important?
Understanding your burn rate is key for the success of your business, particularly for SaaS startups—82% of startups fail because of cash flow problems. Your burn rate lets you know how much revenue is needed, and whether you’re using it efficiently or not. Additionally, your burn rate helps you know how much money is left after expenses so you can plan and reinvest responsibly. And if you're a funded startup, your burn rate is even more crucial.
Schedule a time to meet with your Chief Financial Officer and/or your finance team.
What to do next quarter:
Create an active planning solution. In order to scale, it’s necessary for your finance team to set a plan for allocating capital. This plan includes putting the right people, systems, and processes in place that are necessary for your business to grow.
To help you get started creating your own plan toward growth and hypergrowth, we’ve gotten valuable intel directly from growth expert, Byron Deeter. In his almost two decades of experience working with and counseling a wide selection of companies and individuals through growth and hypergrowth, he says there are three questions that consistently come up. And “knowing how to answer them—and why they are so important—is essential to the success of your company.”
Below are some key points straight out of his ebook, SaaS Growth Survival Guide, to help you understand what it takes to become a top cloud business.
The three key questions every founder and CFO face when they consider where they’re headed and how they’re going to get there are:
How fast should we grow?
How much should we burn?
How do we scale?
How fast should we grow?
To effectively address the “how fast should we grow?” question, it’s essential that a finance team be equipped with tools that go beyond simply reporting financials. It’s important to have the ability to quickly integrate and analyze GL data, CRM data, and transactional and operational data about how you performed in order to gain insight into what the future holds for finance leaders and the industry. Some key ways to assess how fast to grow include:
ARR (annual recurring revenue) under contract
How much should we burn?
This burn-rate question can be particularly challenging. There must be flexibility, both in mindset as well as the tools to address this question. It also helps to study the journey of other cloud companies. As a fast growth software business, paying attention to both annual growth percentage and free cash flow (FCF) margins is important.
There are a couple of good guidelines for establishing optimal burn rates and making sure a business is focused on efficient growth:
Rule of 40: The Rule of 40 offers a simple assessment of burn rate to distinguish well-run cloud companies from the rest of the pack. To calculate, simply add a company’s current growth rate to its profitability margin.
We’ve taken this one step further and fine-tuned it specifically for cloud businesses, in creating the Bessemer Efficiency Score. This metric measures a company’s efficiency by taking the sum of its percent growth + percent free cash flow margin. This calculation quantifies the growth efficiency for a given cloud business.
When assessing burn rate, you can reap huge benefits from real bottomup planning that helps develop a robust picture of the business. That planning shouldn’t be a one-and-done exercise, but rather ongoing, real-time planning and rolling forecasts should become the norm. Some key considerations include:
How do we scale?
The finance leader is probably the only person in the company who can consistently capture the whole picture—a consolidated view that pulls key metrics together from across the business, sets clear definitions, and creates a unified way of reporting and managing these metrics. That holistic view should provide key insights into the smartest and most strategic approach to effectively scaling a company. It’s essential to keep top of mind the key pillars that support effectively scaling the business:
Retaining customers and growing the core customer base.
Identifying the right KPIs.
Invest behind those KPIs
A key consideration when addressing the scale question is the interplay between customer lifetime to value (LTV) versus customer acquisition cost (CAC). In a cloud business, there is more insight and control over the variables impacting the LTV to CAC ratio than in a lot of other businesses.
What’s the best answer to finding the sweet spot to this interplay? Delve into the churn rate, which represents the annual percentage rate at which customers stop subscribing to a company’s service. Much like burn rate, the perspective on churn can be somewhat subjective depending on a range of factors unique to the company. So a 1 percent monthly churn isn’t necessarily good or bad. Obviously, less churn is generally better, but for different types of businesses, calculations can vary considerably.
Implement your active planning process and track against it to learn what the benchmark for your business should be. As with any process, you want to continuously evaluate, modify, and make sure it’s evolving accordingly to ensure the ultimate goal—growth.
Who should own this?
Your CFO and finance team.
Who's up next week?
Next week, Kissflow CEO, Suresh Sambandam, schools us on customer development.
Do us a favor?
Part of the way we measure success is by seeing if our content is shareable. If you got value from this episode and write up, we'd appreciate a share on Twitter or LinkedIn.
This is a ProfitWell Recur production—the first media network dedicated entirely to the SaaS and subscription space.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.