Tuesday, February 16, 2016

The Startup experience: Linear vs Exponential

When you are starting a company, the week by week growth rate is important to track. Initially, it will be very chaotic. Hopefully, early on, you will find a way to make your revenue process predictable. Investors are looking for evidence of this predictability. They are also looking for something else. They are looking for evidence of growth. When they are thinking about growth in revenues, they are looking for a percentage growth on a week by week basis. More data points can help you get a handle on the foundations of your business model. 

Looking at the curve above. This company starts with $1000 Monthly Recurring Revenue (MRR). The blue line represents an initial growth rate of $100/month, which is 10% growth in the first month. The Orange line represents a Monthly growth rate of 10% a month, month over month. While the Red line represents a 5% month over month growth. 

All of these start out at the same point, but the 10% month over month growth quickly outstrips the linear growth. At the end of 3 years (36 months) , the 10% growth represents a 5X increase compared to the 5% growth curve. 

More interestingly, while the linear growth started at 10%, by month thirty, it has crossed over and is the same as the 5% curve. 

When you are looking at your growth oriented startup, you should be looking at at least kind of exponential growth. That is growing at a regular X% growth month over month. 

If you have a 10% month over month growth, your company is approximately a 3X company. If you have 20% month over month growth, then your company is a 9X company. If you are aiming at a 10X company, you need to reach 22% month over month growth on a sustained basis. 

Sunday, February 14, 2016

Cashflow Projection: A Pillar of your Startup

The last two boxes in the Lean Canvas are Income and Expense. From a canvas point of view it is meant to get you to be thinking about the key factors involved in your business. However, the point of the Lean Canvas is to built the foundations of your business model. To get your model to a sufficient level of detail that you can use it over time, you build a cashflow projection.  Each of the details of your startup that are critical to the business process will show up in this spreadsheet.

Each box of the Lean Canvas provides assumptions and critical factors for your business model and they will form the basis of your cashflow spreadsheet. As you run your business, you will want to compute and recompute how your business model as represented by the spreadsheet matches up with the actual results that you see in your business. You will want to do this on a weekly basis. 
Looking at the graph above, we see a business that is subscription business, which has very limited expenses and which has a 15% growth rate as the basis of this chart. The ongoing expenses over whelm the income for a long time. While we see the income starting to turn the corner, this business will be cashflow negative for more than 3 years. 

However, small changes in growth rate can change the experience dramatically. 

This next graph is the same company, but with a 25% growth rate each month. This is a company , which is a 10X company, but in order to survive, it will need to take $200,000 in outside funding. 

With this new cash infusion, the company is able to remain solvent, at least in this model. However, if the growth rate was higher , with just a 30% per month growth rate, that same company would not need to take outside money at all. 
The small differences in revenue and the growth rate of the revenue can make substantial differences on the lifespan of your company. Digging into the details of the consequences of your assumptions will be vital to your progress. 

​There are several key factors you need to work with:
  • The initial amount of cash you bring to the company
  • The point at which you run out of cash. Which is determined by your Burn Rate. This company has a one year Runway
  • The point at which you get to cash flow positive.
  • And the point that you break even. 
Spend the time to build  and then regularly revise your cashflow projection for your startup.