Updated: Feb 22
Author: Oswald Yannick
A couple of weeks ago, I got a question on Qoorio on budgeting in an early-stage company. Doing so in a company of 5-15 or 20-70 people is, of course, very different from setting up a budget for a company at Series B+ stage of, let's say, 100+ people. Let's focus on the former here.
Here is the answer. There is no scientifically accurate approach to budget break-downs at the early stage. Your budget entirely depends on your strategy, and where you should spend your time and money to achieve it. As we discussed in a previous post, the only golden rule there is that a founder should never have to kill a great product because they burned through cash too quickly trying to scale something that is not ready, yet.
The key is to have a strategy with proximate objectives first.Only then can you turn to budgeting.
The goal of a strategy is to formulate a hypothesis around what proximate objectives you need and can achieve to reach the next stage, which, in most cases, is your next fundraising round. Think of budgeting as a refinement of the objectives setting process: How do you allocate your finite resources best to achieve these objectives?
I call this early-stage startup strategy setting 'The Startup Jiujitsu'! Jiujitsu was developed to combat the samurai of feudal Japan as a method for defeating an armed opponent in which one uses only a small or no weapon at all. Jiu' can be translated as 'flexible, or yielding", and "Jitsu" as 'art or technique'. 'Jiujitsu' thus means 'yielding-art'. Its core philosophy is to manipulate the opponent's (in our case the market's) force against him with precise and super effective movements rather than confronting or opposing it with one's own force alone. Startups have to do the same. We only have limited resources, but have spotted a huge market opportunity that is coming our way. We need to channel our resources on key actions to have a shot at dominating it...
Step 1. Form an hyopthesis: 'What does Success look like?'
One of the best business books I read is 'Good Strategy. Bad Strategy' from Richard Rumelt. Richard puts it well: 'Where does scientific knowledge come from? You know the process. A good scientist pushes to the edges of knowledge and then reaches beyond, forming a hypothesis about how things work in that unknown territory. If the scientist avoids the edge, working with what is already well known, life will be comfortable, but there will be neither fame nor honor (= success). In the same way, a good business deals with the edge between the known and the unknown. Only there are found the opportunities to keep ahead of rivals. There is no avoiding it. That uneasy sense of ambiguity you feel is real. It is the scent of opportunity...'
So, what exactly is a good vs. bad strategy? Is there a way to systemically craft good strategies? Let's look at Richard's 'Kernel of Good Strategy', and at an example later on.
First, do not confuse strategy with vision or ambition. You became an entrepreneur because you diagnosed a massive, but concise challenge to be solved. The mission alone to solve it is not a strategy, though.