The Burn Rate and Runway
It’s always painful for us to hear a new wantrepreneur talking about the first steps they’re going to take when they go into business. They usually say something like, “Well, if I’m going to go into business, I’m going to need to get an office, a production facility, and a warehouse.” And “I’m going to need a new car, a new truck, new furniture, and new machinery. Oh, and I’m going to need a full staff.”
Interestingly, they believe that their business success is based on the acquisition of those items. They’re excited to hear stories of how similar startups with similar wish lists got funded. Presumably, a big reason for the funding is to support all that overhead in lieu of income from sales for a period of time. This is also known as a “burn rate.” The idea is to get the business all set up with enough in the bank to pay your bills until sales “take off.” This is also known as a “runway.”
The Millstone Around Your Neck
We grimace when we hear these comments. True, their business will eventually need these things, for at least the startup and build up phase. However, these reoccurring monthly costs are a huge millstone around their necks, pulling them down while they’re trying to swim upstream to achieve a positive cash flow. Like it’s not hard enough already? So now, before we even achieve a positive cash flow, let’s put our precious time, money, and attention into building out the business? No!
Some startups may know that sales will be the most difficult part. They suspect it’s a lot of energy for very little return, especially at first. But they can put it off and take refuge in doing something that does “show”, like spending money on assets and overhead. Other startups may just plain underestimate the amount of time, energy and focus it takes to actually make sales happen.
What’s crazy for us is how easy it is to borrow money when there’s hard assets involved. This lending policy further temps startups to put on that millstone. It’s as if the lenders and investors believe they can take those assets back if you default. But even if they can, they’re hard to move and certainly can’t return the full cost.
Focus on Sales not the Millstone
For whatever reason, tying up precious capital in bricks and mortar and bringing on a staff can distract you from your primary objective, sales! You can outsource most of this stuff anyway. In fact, once you free yourself of the monthly millstone, you may decide you don’t want to burden yourself with a bunch of assets and overhead, so you can put more focus on sales. We believe that sales earns these types of assets, not the other way around.
When we started Barefoot Wine, the first thing people would ask us was, “Oh, the wine business! Where are your vineyards and how many acres do you have?” Our answer was simple, “None! But we have sales – lots of sales!”
When we got started, we couldn’t get financing so we had to make sales happen early and often just to survive. We had no runway and we couldn’t afford a millstone. So we outsourced as much as we could. Today we recommend this “beyond lean” startup strategy to our clients.
Outsource Everything But…
We believe you can outsource everything but sales, accounting, and quality control. By doing the sales yourself, especially to get started, you gain a deep respect for the customer and the market fit of your products and services. This will become a priceless experience as you grow your company and ultimately hire and train your own salespeople.
In-house accounting is critical. You need to see the numbers now! You can’t wait a month or two to see what’s happening in your business. It will be too late! That business plan you spent so much time writing is now replaced by the cash flow report. And successful cash flow management turns out to be a critical startup skill.
You can outsource production, but you can’t outsource quality control. You need to have your person in your contracted facilities to ensure quality. Your production contracts must specify in great detail all the requirements necessary before you will pay for those goods and services.
But pretty much everything else can be done by somebody else. And in many cases, better than you can do it yourself. Don’t encumber your fledgling business with a bunch of overhead bills hungry for monthly bucks. Jump on the hardest job, sales! Once you make that sale, you’ll be surprised at how many vendors jump out of the woodwork to help you keep those sales going. After all, your sales are what’s paying everybody’s bills.
The next time a wantrepreneur tells us about their startup plans, we would love to hear them say, “To get started, I’m outsourcing everything except for sales, accounting, and quality control!”
Who We Are
Michael Houlihan and Bonnie Harvey co-authored the New York Times bestselling business book, The Barefoot Spirit: How Hardship, Hustle, and Heart Built America’s #1 Wine Brand. The book has been selected as recommended reading in the CEO Library for CEO Forum, the C-Suite Book Club, and numerous university classes on business and entrepreneurship. It chronicles their humble beginnings from the laundry room of a rented Sonoma County farmhouse to the board room of E&J Gallo, who ultimately acquired their brand and engaged them as brand consultants. Barefoot is now the world’s largest wine brand.
Beginning with virtually no money and no wine industry experience, they employed innovative ideas to overcome obstacles, create new markets and forge strategic alliances. They pioneered Worthy Cause Marketing and performance-based compensation. They built an internationally bestselling brand and received their industry’s “Hot Brand” award for several consecutive years.
They offer their Guiding Principles for Success (GPS) to help entrepreneurs become successful. Their book, The Entrepreneurial Culture: 23 Ways To Engage and Empower Your People, helps corporations maximize the value of their human resources.
Currently they travel the world leading workshops, trainings, & keynoting at business schools, corporations, conferences. They are regular media guests and contributors to international publications and professional journals. They are C-Suite Network Advisors & Contributing Editors. Visit their popular brand building site at www.consumerbrandbuilders.com.
To make inquiries for keynote speaking, trainings or consulting, please contact firstname.lastname@example.org.