Cash

In the beginning, cash is all that matters because it is the lifeblood of the company. It pays the team, rents the apartment you work out of, gets super-fast Internet access and a lot of snacks from Costco. It’s the printout from the ATM at the Mountain View Safeway that has two commas in it, and you dance around for a few minutes before reality sets in: the timer has started.

Managing the cash balance of the company as the most significant high-level financial indicator makes sense in the early days. You take the total bank balance you have, and divide it by how much you spent this month, and that tells you roughly how many months you have left before you run out of money. Maybe you take it one step further and make a simple forecast showing estimated hires and an estimated monthly rent when you move into a real office, but it’s still very simple.

Cash: Net Burn Rate

After coming so close to death when we shut down Referly and re-launched the company, we managed Mattermark’s accounting on a cash basis until the end of 2014. This graph shows our burn rate and months of runway:

Each month, we look at the change to our bank balance and ask, “was it greater or less than $400K? And if it was greater, why?”

We raised $6.5M in our Series A, which we just started spending. As I’ve shared previously, we’re sticking to a net burn rate of $400K per month which means in 12 months we should see our bank balance decrease by $4.8M ($400K x 12 months). Another way to think about raising this funding is that we bought 16.25 ($6.5M / $400K) of runway with 25% of the company.

So Mattermark gets to spend $400K a month, right? WRONG.

If we collect $1M in cash this month, we can spend $1.4M this month and we’ll have a net burn rate of $400K. If we collect $200K in cash this month, we can spend $600K and have a net burn rate of $400K. While spending $1.4M a month might sound irresponsible if you’ve been reading the news about startup burn rates, in the $1.4M scenario the company is covering 71% of expenses with cash from operations. In the $600K expense scenario, the company is covering only 33%.

As long as revenues are growing, burning $400K a month becomes less and less risky over time. Which brings us to our next phase of money: Run Rate.