If the default is death, stay alive.

I’ve spent half of my career and most of the past five years working at venture-capital-backed startups. The companies are not profitable. They rely on infusions from investors to keep going. Success is building a business model that eventually escapes the unprofitability trap, rewarding investors and employees. Until that happens, the business is slowly (or quickly!) dying, burning its reserves (runway) toward zero.

The Default is Death

Working at an unprofitable startup is uniquely different from other businesses in that the default is death. Every day, the business draws closer to its end. Business as usual is unacceptable because it results in failure. As a company and employee, you are forced to accept more risk to stay alive.

This environment is terrifying and, if not managed, a source of existential dread as the Sword of Damocles draws ever nearer. It’s also exciting! You have to take risks to survive, so a well-run startup will operate faster and more aggressively than a profitable business.

Cash vs. Time

The two most important resources in a startup are cash and time. They’re so tightly coupled they’re almost the same thing. A company with $1.2M in the bank burning $100k/month has 12 months of runway. Cut burn to $50k/month and runway becomes 24 months. Increase revenue by $50k/month and you get the same result. The game is extending runway until you reach profitability. You won’t grow with $0 in expenses, but you’ll die quickly if you spend your reserves without results; balancing cost and time is the core prioritization tension.

Prioritize Against Runway

So how do you prioritize at an unprofitable startup? The general rule I follow is this:

Don’t work on anything with a timeline longer than your runway UNLESS it unlocks the next fundraise.

In other words, if you will die before you get the benefit and it doesn’t help your next fundraise, don’t do it.

Does this mean that all long-term projects should be abandoned? No. But the vast majority of everyone’s time and resources should be hyper-focused on what needs to be accomplished to enable the next fundraise.

While this advice may seem obvious, it can be difficult to apply in day-to-day operations. Every startup I’ve worked at has struggled with these decisions. Consider the following questions for a company with 6 months of runway:

  • Should we hire a marketing guru who will help us generate more revenue 12 months from now? Answer: Don’t hire.
  • Should we prepay for next year’s software spend to lock in a discount? Answer: Don’t prepay.
  • Should we focus on building a new product that won’t earn revenue for 12 months, or growing revenue from the current product right now? Answer: Short-term revenue (you could argue that progress on a new product could help with fundraising now).

In a vacuum, each alternative seems reasonable. There is work that needs to get done so we need to hire employees. We can save money next year by prepaying. But within the context of runway, these are all decisions that hurt us in the short term with little or no guaranteed benefit.

I purchased Anrok while I was Director of Operations at Phin Security and I loved it (case study here). What isn’t in that case study: I deliberately delayed buying any sales tax solution until we completed a fundraise and extended our runway. Sales tax compliance, while important. It didn’t contribute to the next raise and would have been, at best, a distraction and, at worst, a drain on scarce resources. Once the fundraise closed, our runway and expectations expanded to include compliance and I moved ahead.

Good decisions made at the wrong time are bad decisions. At a startup, every choice must be evaluated in the context of revenue, profitability, and runway. If your work doesn’t extend runway or unlock the next fundraise, you’re working on the wrong thing. Stop, reflect, and reprioritize.