The way you manage your startup’s cash in the early days will directly impact on your chances to succeed. By making the right choices, you’ll guarantee enough money to support your validation process and to find traction. By making the wrong ones, you’ll find yourself in a dead-end, with your pockets empty.
In the next paragraphs, you’ll understand 3 key attitudes that will lead you to the right cash choices.
But, don’t worry; You’ll be able to do understand them all, even if you don’t know much about finance (or if you simply hate it).
So, here we go.
1. Don’t Freak Out About Building “All The Finance”
Managing the cash is simply managing the cash.
Don’t make it a bigger deal then it really is.
Maybe when you read “cash”, you think about “finance”. And when you think about “finance”, you think about “financial model”. And from there, other words pop up in your mind such as “Balance Sheet”, “Valuation”, “Income Statement”, “Cap Table”, and so on….
Don’t become overwhelmed by all these reports and analysis, before organizing your thoughts about how you plan to allocate your cash.
Because, right now, your certainty about key elements—such as revenue—is near zero. Hence, spending too much time and energy on such reports before planning your cash for execution, may delay your progress.
Don’t get me wrong.
These elements are indeed essential to any serious startup or company.
However, getting your cash planning ready so you can start the validation process sooner and safer must come first. That means you shouldn’t group and try to check all these items off of your list under the “Financial stuff” label.
Start with mastering your cash planning.
2. Adopt An Early-Stage Startup’s Cash Mindset
Okay. Let’s suppose you trusted my first advice and now you want to prioritize your startup’s cash planning.
But, where should you start from?
Start with adopting the right mindset about your startup’s money.
To help you achieve this mindset, I crafted a cash “mantra” with the key elements you should keep in your mind:
So, read it.
Out loud, please.
Now, read it again.
I want you to carefully pay attention to each word’s meaning.
Are they clear? Does the overall meaning makes sense to you?
Let’s break the “mantra” into 4 parts, so we can better digest it.
“In the early-stage of my startup […]”
Yep; Your attitude towards cash will depend on the stage your startup is. This “mantra” serves the validation process of an early-stage startup. We’re not focusing on scaling, nor being profitable yet.
“[…] I will prioritize its cash allocation to validate […]”
Validation is definitely a word we’ll use a lot. In the early stage, every dollar focused on validation is an investment. It means you’re allocating your money to learn whether your assumptions are right or not. Also, it means that you should be really diligent about items that don’t directly contribute to the validation process.
“[…] the riskiest assumptions of my idea […]”
That means the validation process to be worth must be based on the most critical assumptions of your vision. When you’re investing your cash to learn about those assumptions… success will be around the corner. When you’re not certain about the main assumptions to be tested and validated, stop and map them.
“[…] in the most effective way.”
Wise last words. The previous parts of the mantra refer to effectiveness (focusing on the right things). This last part, aims at efficiency (doing the things in the most productive way). In other words, while doing the right things, keep asking yourself: what is the cheapest way of achieving the result I want to achieve? Do I need to spend so much to produce this outcome?
Read the mantra out loud, once. Twice. As many times as it’s necessary for you to fully absorb the words and its meanings.
3. Put It Into Practice (Right Now)
So, now it’s time to check how much of the “theory” you’re using in the real world.
Start by answering these 2 questions:
- Are you investing your startup’s cash EFFECTIVELY? Map which costs are going to the validation process and which are not.
- How EFFICIENTLY are you allocating your cash? Check how you’re spending the money and if there aren’t better (cheaper) ways of achieving the same results you’re trying to produce.
Well, in order to properly answer these questions, you must have a way of structuring your thoughts.
If you don’t have structured anything so far, now it’s the time to do it.
So, start by:
- Building an Excel/Google Sheet with everything you’ve envisioning to spend in the next 24 months.
- Separating this costs and expenses into “Validation” and “Non-Validation” categories
- Checking the non-validation costs (which ones are really necessary? which ones are not?)
- Mapping the validation costs (how could you achieve the same validation results in a cheaper way?)
That’s it. Make it happen. Right now.
👉 Hey, if you’re planning the cash for your early-stage (pre-traction) startup, I have something you’ll love. A simple and powerful Excel model that will help you to put into practice what you learned here. It allows you to generate key cash metrics (cash runway, cash burn rate, funding needs, # of cycles), from the perspective of an early-stage startup (considering build-measure-learn cycles). Check it out: