What’s Up With Startup Burn Rates?

I finally managed to catch up with my reading and found a rather intriguing post by Fred Wilson about startup burn rates. More specifically, how much should startup spend (follow up post here) to build different stages of its product. What kind of amused me was the $50K monthly burn rate when a startup is in a Building Product Stage. My experience has been way different and I believe that you will agree with me – you don’t need to spend that much.

There was one thing that I didn’t quite get. As a founder who has a vision about your product (is there any other way at all?), why on Earth would you need a product manager? The founder, from all the people in the world, should be the one who knows exactly how the product should work and who it is for. Not having previous experience with product management shouldn’t be an acceptable excuse to any founder.

Apparently it seems that it is acceptable to work on the first stage for around 6-9 months and spend approximately $375K while doing that. Don’t you think that it’s a bit too much? If a founder doesn’t take any seed funding to build a minimum viable product (strongly recommended in my opinion) then I bet that most of the founders out there don’t have that spare $375K to spend just to see if their idea will fly or not.

If I wouldn’t have any previous experience I probably wouldn’t be surprised by the mentioned time and cost to build a minimum viable product. However, I have some experience when it comes to helping founders to get their MVP out there. With that experience in mind, I’ve found that it takes usually less than 3 months (one designer + one engineer + some additional help will go a long way) to get the first version done. It will usually be good enough to test if their idea and business model works and go after seed funding on much better terms than without a MVP.

You can do it for less

Now, some more personal experience. You might or might not know that we’re working on two products of our own and we’ve taken somewhat different approach on execution for both of them.

Shoperb, a rather complex eCommerce SaaS platform, has been in the works for over a year with total actual development time spent around 5 months or so. We want it to have all the necessary features to successfully run an online store when we launch some time next year. From technical point of view Shoperb has much more complex features (tax rules, shipping rules, etc) than an average product we work with (want to take a look at it, let me know). On top of that, at some point I realized that the design could be quite a bit better, so I redesigned it even before we launched. That could be considered as a mistake but I’m still thinking that it was a right decision – we’re coming out with better product thanks to that.

Then we have Photry, a cloud backup platform for photos, that was created within 48 hours at Rails Rumble 2010. With that time we built a MVP that works well and is actually getting some organic traffic and more signups than we would ever have hoped for. That was about a year ago. In the meanwhile a new design was created (a lot better, if I may add) and about a week ago one of our engineers started working on it. By the end of this year we will have a next version of Phtory ready and hopefully in early January we’ll have a nice re-launch.

Both of these services are being built with very limited resources. Only more lately one of our engineers have worked on Shoperb almost full time and the progress this far has been awesome. Same experience with Photry – amazing progress with minimum amount of time. How much is it costing us? A lot less than was brought out by Mr. Wilson’s post.

Conclusion

So what am I saying with all this? It is possible to build something without costing founders arms and legs. Hiring five employees that early in the product’s life cycle clearly seems like spending too much. Founders can do and do it well with less money spent. If a founder has some savings (lets say $50K) then they most probably can do without seed funding. Even if they need funding, they can take way smaller amount of funding and save more equity for themselves. They can find themselves a decent engineering partner to build the MVP for their awesome idea. When looking for that partner, a proper due diligence on partners is strongly recommended, just like it would be done with any investors or employees. Getting in touch with their previous clients will go a long way in building that relationship.

I know that I’m biased but with $50K it is more reasonable to just outsource this work to experienced experts (may I recommend us?). With constant communication it will be a breeze to get your first version out. Just like we would be sitting in your office. Except you don’t need to spend on office or anything related to it.

On top of that, this will save founders (even if they’ve taken seed funding) a big slice of equity. Now isn’t that what we all want, get more for less? I know that I prefer it that way and most probably so do you.

Martin Kivi

Martin is the Founder and CEO of PerfectLine. He is passionate about front end development, user interface design and building awesome products. He will be your first point of contact here at PerfectLine.