How early-stage startups can exercise financial discipline around burn rates

This article is from an episode of Matrix Moments by Matrix Partners India, a podcast featuring candid conversations on what it really takes to survive the startup world. This is heavily revised from the original show transcript. For the full interview, go here.

A critical factor that determines an early-stage startup’s success or failure is its level of spending or burn rate. Practicing extreme financial discipline is therefore crucial.

In this episode, Avnish Bajaj, founder and managing director of Matrix Partners India, talks about the importance of managing a startup’s finances and business performance.

What is the relevance of plans to venture capital investing and startups?

In VC investing, we are essentially trying to underwrite the future. And there’s naturally ambiguity there because it’s very hard to know the future, especially if you’re trying to do disruptive things.

So, a plan is a convergence of the founder’s view of the future (because it’s really their view that the investor is buying into) and the VC’s. If a startup is about to do something big, how would you know whether it’s going to work or not? And how would investors get on the same page as them? That, to me is, a plan.

For VCs, there’s an investment memo where we put down a plan of what success would look like. This provides the markers towards success.

Why would plans matter when early-stage startups are naturally hard to predict?

In my view, when a founder and an investor get into a relationship, they are signing multiple contracts, in a way. One contract is obviously the legal contract.

The other is a moral contract, which is about what two parties expect from each other. And frankly, we at Matrix do spend a lot of time talking about those expectations.

The third contract is the plan, or the performance contract. This may not be something that people spend a lot of time on, especially for very early-stage businesses. Even so, a founder and an investor have to be on the same page in terms of what success would look like. If things are not leading to that, then maybe they need to look at things differently. I think this provides a common frame of reference.

What lessons can you share about excercising discipline around plans and burn rates?

In a business, especially at the early stage, the things you can control are more on the cost side than on the revenue side. On the revenue side, there are a bunch of uncertainties involved: Will this product find the right market? Will it start growing on its own without too much marketing? Will its founders be able to monetize from their users?