When a seed stage startup shows me their cash burn projections (believe it or not) I often think they can’t possible spend the money this fast. The reason is hiring. At the very beginning, most of the burn is in salaries and employee related costs. Often forecasts have unrealistic hiring expectations. The CEO is sure that she/he can hire 4 this quarter, 5 next quarter and 6 the quarter after that and there will be no turnover.
That pretty much never turns out to be the case. There are a couple reasons why.
As an investor, I’m starting with the premise that I will help make sure the initial hires are disciplined hires. There will be no CFOs. There will be no Senior Vice Presidents or worse Executive Vice Presidents. Each person hired will be evaluated against needed skill set and ability to contribute to the vision. It seems obvious, but it is easy to veer from the path.
And talent, as everybody knows is scarce. It takes time to find people who are great and who fit with the company chemistry. If a company starts out by being absurdly selective in hiring (which they should), than it takes even longer than normal.
The final reason is attrition and bad hires. Sometimes the person hired isn’t getting what they bargained for. Sometimes the company isn’t.
As I may have mentioned before in the seed stage, my belief is that a startup gets two small mistakes or one medium mistake. More than that and there could be trouble raising the next funding round. It should be a surprise to nobody that hiring is among the most common mistakes.
If a company brings on an engineer who is not contributing or isn’t as talented as advertised, that person needs to go – quickly. If the new bus. dev. person isn’t making things happen. The founder should waste no time. There just isn’t the capital to wait and see.
So… if a company does what it should, which is to hire slowly and fire quickly, then building the right team takes time. The interesting side effect is slower cash burn.
The trick of course is to not sacrifice growth.