A budget template for early-stage startups

We’ve recently decided to share the simple budget we made for Unit before raising our $3.6m seed round. We’ve decided to remove sensitive numbers / items and share it with friends as they were getting ready to raise their own first round. All of them found it helpful, so we’ve decided to turn it into a template that can serve most early-stage startups. You can find it here or on the link at the end of this post.

What’s in the budget

This 2-year budget template includes the following, quarter-by-quarter:

  • Business milestones: launch, # clients
  • Expenses: payroll (headcount), non-payroll, one-time
  • Revenues 1
  • Cash in bank: calculated from $ raised, expenses and revenues

Two things that benefit directly from a good budget are your own risk management and your fundraising process. Let’s explain this.

It’s good for risk management

Before you raise, make sure you understand the key dangers on your way to the next round. By “key dangers” I mean risky assumptions of the type that can kill your company. Every company is a bit different, but the universal dangers in startups are:

  1. Risk #1: not launching on time
  2. Risk #2: launching but not getting the traction you’re aiming for

It’s important to think defensively and be honest about those key dangers. We’ve raised our seed before we had a working product. The milestones ahead of us were:

  1. Sign a partner bank (6 month process)
  2. Implement with the partner bank (6 month process)
  3. Launch
  4. Sign first clients (4 month process)
  5. Raise A round

While we’re doing our best to reach these milestones, it was a good idea to ask ourselves: what would be the financial implications of things going wrong? How can we ensure that we would be OK if, for reasons outside of our control, launch took 2 years instead of 1 year (2x longer)? Of if market went sideways and signing our first clients took a year instead of 4 months (3x longer)?

Budgeting for risk #1: not launching on time. We took a decision to keep our team small, and our burn rate minimal, as we work towards milestone #1. By “minimal” I mean so negligible that we could stomach even a 3x delay without much impact on our cash. We decided that we should grow the team and the burn only once hit milestone #1. This would not only help preserve cash. It would also ensure that we understand the scope and hiring needs better, which reduces the risk on our way to milestone #2. This is exactly what happened.

Budgeting for risk #2: launching but not getting the traction you’re aiming for. 100% of startups face this risk and the reasons are plentiful. You build something not enough people want. Sales cycles are longer than you’d thought. The competitive landscape changes. A macro event like covid or a financial crisis hits. We started by adding a small section to our budget, to reflect our cash position and burn rate at launch (0 clients), including a brutally honest number representing “months left to live”:

(the numbers here aren’t real, but you get the point)

Managing this risk is straightforward: start by assuming that many, many things will go wrong and work towards a “months left to live” of 24+. You do it by challenging yourself and controlling the three budget elements you can control: $ raised (see next section), $ burned on your way to launch and monthly burn at launch. Not every startup journey lends itself to 24+ months to live with zero or few clients, but as with many things, you can always get better at pushing the envelope. Talk to experienced founders and ask them to challenge you.

Is your budget lean? Make execution even leaner to earn your company more progress before your next round. Try to hit all the milestones with 30-40% less spend. Focus on de-risking with minimal resources and do all you can to delay expenses. It mostly means only hiring people once you really, really need them.

It’s good for fundraising

A good budget will help you:

Understand how much you need to raise: during fundraising, most investors will ask you why you’ve decided to raise the amount you’re raising. The best answer is “we’re planning for a runway of [X]. During this period, we plan to hit milestones [1] [2] and then raise our next round. This is the funding we need to get there. We’re happy to share our budget and assumptions”. X ranges from 2-3 years- the exact number depends on what you’re building, the fundraising landscape & more.

Understand how you plan to use the funds you’re raising: investors will often ask about your use of funds to ensure it’s consistent with the story you’re telling and your unit economics. What’s the split between engineering, legal, 3rd party tech, go-to-market, and how does it change with time? What’s the split between payroll vs. non-payroll expenses, and how does it change with time? Every budget I’ve ever made revealed counter-intuitive answers to these questions.

Put all your milestones and assumptions on one timeline: the numbers in your budget should correlate and help you tell a story. The story starts with the key milestones: you work towards launch, then you launch, then you onboard first customers, then you onboard more. Along this timeline, your team is initially tiny and built around engineering. Sales and marketing spend both kick in immediately after launch. First customers sign up and are greeted by a tiny but fully-trained CS team. When looking at your budget as a story, you’ll often find plot holes and inconsistencies that need to be fixed. You may discover that you need to budget more spend because you’ve wrongly assumed minimal engineering team growth after launch (oops). Or you’ve wrongly assumed an understaffed CS organization relative to the number of customers you plan to sign (oops). On the other hand, you may need to budget less spend because a major recurring expense on 3rd party tech may not be required until you actually launch (yay). Look for all these inconsistencies and fix them until the budget reads like a story.

Have intelligent conversations with investors on runway, burn rate and your next round: investors will ask you about all of the above. Make sure you’re able to tell the budget story to an investor in under 2 minutes, clearly explain the headcount + spend around each milestone, and clearly explain how your budget ends with your next round. You should aim to start raising 6-12 months before you actually run out of money.

Link to the budget template

Here. Enjoy!

1 Revenues are often meaningless at early stage, assuming (1) investors don’t have fundamental doubts about your unit economics (2) you don’t expect to generate significant revenues before your next round. We’ve therefore reduced the revenue side to a few very basic assumptions. With time, revenue forecasting becomes critically important and your models will have to evolve accordingly, but that’s outside the scope of this template.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s