How startups should budget in uncertain times 

I was the archetypal startup CEO: I paused my degree at Stanford to start a company, and after it failed I found myself needing to preserve cash to make student loan payments.

With an old Nissan Sentra and roommates in Menlo Park, my biggest variable cost was food. So it was ramen every night. On a good week, I might have had some sushi on Friday night and if I’d managed to come in under budget somehow (someone’s parents bought dinner) I could maybe splurge again on Saturday with friends.

My guiding principle at this time is surely familiar: Control burn until income streams are more predictable. Many startups find themselves in a similar position these days: ramen or sushi?

Some businesses are thriving during COVID-19 times, but will it last? Take online learning tools: Everybody needs online learning at the moment. When in-person reopens, probably some amount of learning will stay online since we all learned how to do it, but likely not 100%. Worse than not knowing what the percentage will be is the constant variation across geography, segment and vertical. It’s not that different from the current situation for me in San Francisco: If I want to find somewhere to buy ramen or sushi, I first have to check which spots are even open before navigating their constantly changing hours and menus.

Startup budgeting looks a bit like that now. Key assumptions we used for planning — already prone to some variation in a startup — are more volatile. Conversion rate from MQL to SQL, how many decision-makers need to approve a contract, leads generated per event (and what is an event these days), net renewal rates — these factors are all changing and they’re changing differently by customer segment, by geography and by product category. The new normal is highly dynamic.

Navigate through the uncertainty (and reevaluate quarterly)

How can we budget through this? Everyone replanned in April. Plan for a similar cycle every quarter. “Are we at a new normal? How do we know? Do we feel confident about that?”

In addition to the usual factors companies use to make predictions on metrics — things like growth rate and conversion rate — now we also have to consider a variety of outside factors: How the current cycle has impacted customers and prospects, how they’re readjusting budgets and their approach to unpredictability over the coming months. It might look like a new normal is establishing, but COVID flare-ups could happen again causing lockdowns, the U.S. is in an election cycle and there are prospects of further government intervention.

Here’s a recipe for deciding what to cook or whether you can go out:

Set assumptions and analyze, then reset on a regular and irregular cadence

Visit your budget each quarter. AND any month that burn falls outside of expectations, make adjustments.

We recommend quarterly because sales cycles tend to be longer than a few weeks so it’s hard to get data back and make adjustments after only two to three weeks. Here are the key inputs you should monitor:

Revenue

Look at how much you are expecting from renewing customers and your pipeline. Start with a bottoms-up analysis that also incorporates sensitivity analysis so you can get a better understanding of range and comfort in terms of revenue. Look at every deal and every expense and segment it. The goal is to not only predict what might come through this quarter but also find patterns: Customers in the education space are renewing, but only those in northern states.

Companies larger than 1,000 employees are now taking 90 days from lead to close, but those larger than 10,000 employees who had a budget for this type of product are still at 45 — except in APAC.

Lead flows and conversion rates

Past data doesn’t give us as much insight about the future as it might have pre-COVID-19. Q4 2019 is your last normal quarter — which probably won’t help much for Q3 and Q4 of this quarter because of all of the variables and uncertainty. As a baseline think about having 20% more leads in Q4 than Q2. While this may not be as optimistic as some people want to hear, things do appear to be getting better.

Then you can model sensitivity off that baseline: If lead gen is exactly like Q2 here’s what it would like for our budget. If it’s 40% better than Q2 here’s what that would do: Run a special segmentation of opportunities that were generated after March and what kind of path they took through your sales machine. What were the required steps, how long did it take, how many decision-makers were involved, how was it different than before? By preparing and analyzing these scenarios, the board can find a sweet spot.

Demand generation

How much are you going to invest in demand-generating activities — which is cheaper today because there are no travel and events. Are you increasing digital marketing spend? Even more so in times of uncertainty, it’s important to understand which channels are working and how those investments are paying out on your close rate. You can turn these programs up or down based on effectiveness — which can make budgeting a bit more unpredictable until you get baseline data about campaign performance and the stability of that performance over the longer term. In order to fine-tune in this manner, attribution really matters.

Collections

Clearly an important part of budgeting will be assessing what cash will come in. When working on a new deal you have to ask, “If I close it, what is my receivable assumption? What has it been historically?” Given the particular circumstances of your customer base, you may also want to put a buffer on it. So historically you’re collecting every 60 days, you may need to now budget for every 120 days. Customers were asking for payment terms in Q2 and may still be? Consider mapping out different scenarios for your budgeting — historical rates plus 30, historical rates plus 60, etc.
After a while, I was able to get a job and my personal revenue smoothed out. Budgeting eventually became easier and I was able to enjoy sushi on a more regular basis while keeping a stockpile of ramen for hard times.

One thing we know for certain … there will be continued uncertainty. However, with a solid framework in place, a budgeting routine will eventually fall into place.

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