What makes a fund stand out?

Getting LP support (and dollars) is more than just DPI and TVPI. It means proving that you have an edge over all the other funds out there.

But how to figure out what your edge is? And how to communicate it in a slide deck, or a 15 minute pitch?

Enter Carson Monson. Carson is a seasoned LP with a knack for spotting breakout emerging fund managers.

He’s coming to Camp Hustle to share his insights into what makes a fund irresistible, and what clues LPs are using to evaluate funds.

Wanna come? Grab your ticket here.

Today's topic: startups that burn through their runway

Imagine you’re a founder who just closed their first round. In the blink of an eye you’re responsible for managing $500k or even millions of dollars.

Now imagine you don’t have a whole lot of experience managing a P+L. What are the chances that you’re going to burn through that cash faster than expected?

High. The chances are high.

Managing cash flow is a critical part of keeping the business afloat, and yet many founders don’t have the experience needed to do so effectively.

As investors, it can be helpful to recognize what costs founders tend to overspend on, and which practices can help them extend their runway while still investing in growth.

Let’s dig in.

Overspending on talent

One category that startups tend to overspend on is talent.

I get this. Startups with VC backing need to grow at venture-scale rates, and achieve venture scale outcomes.

And the founders can’t do it alone.

But often we see them hire too quickly, offer salaries that are too high, and do so without clear deliverables in place.

When a founder has runway in the bank and milestones to meet, it can be tempting to just get bodies in the door. But this can be disastrous. And expensive.

We encourage founders to take a role from 0-1 before bringing on a full time employee, or even a contractor.

Meaning… they should clearly understand what the role is responsible for, and what specific deliverables are needed before hiring for that position.

Talking to employees in similar roles at other companies will help them get a clearer understanding of what excellence looks like. And scoping out the role in detail will help them avoid over-hiring.

We also recommend that founders leverage equity when putting together attractive employee packages.

People typically join startups for the opportunities that come from having ownership in the biz. Not for the fabulous salaries.

So rather than trying to match the salaries of big companies like Facebook or Amazon, startups should aim for a balance between salary and equity, knowing that their employees stand to reap the rewards if the company exits.

Overspending on Marketing

Spending on marketing is not a bad thing.

But overspending on marketing can be. This can happen especially when the founder prioritizes product development over conversion and retention.

First, the team should test positioning — ideally in organic / free channels — to determine what messaging will lead to the highest conversion rate.

Once they have that dialed in, they can start testing paid channels to get a better sense of CAC and retention across each platform.

This will help the founders determine which channels to invest in more heavily.

From there it’s a matter of figuring out the time it takes to hit profitability with each customer. This will give the founder a strong grasp of their startup’s unit economics:

• how much does it cost to acquire a customer?

• how much money do we earn from that customer?

• how long does it take us to get paid by each customer?

Ideally founders can hold off on building out engineering and product teams until they can answer those three questions with confidence.

Overspending on Infrastructure

With a recent trend towards returning to in-office work, founders might be eyeing some fairly expensive office spaces.

If you can encourage your founders to hold off on that expense, it’ll likely pay off in the future. Commercial rental agreements often stretch to 3-7 years, which is a huge liability for a startup trying to extend their runway for as long as possible.

Startups may also want to avoid paying upfront for annual contracts. Instead, we recommend going month-to-month and regularly re-assessing if the service is still necessary.

Lastly, founders who aren’t negotiating their highest cost contracts are likely leaving money on the table. Software in particular can suck the runway right up, but those contracts can often be flexible.

Best Practices + How You Can Help

As an investor, you are in a unique position to help your portfolio founders manage their burn and extend their runway.

You can:

• help them set up a financial model

• encourage them to do a weekly review of money coming in and money going out

• schedule monthly check-ins to talk about money

Most people don’t want to talk about money. It can make them uncomfortable, scared, and defensive.

But the more informed founders are about where their finances stand, the more likely they are to make choices that will help them extend their runway and increase their revenue.

And the more heads up they’ll be able to give their investors if it looks like their reserves are running low.

Burn baby burn,

Kera from Hustle Fund