As our startup continues to grow and hire, more and more people reach out to us to sponsor events, donate money to non-profits, and use our resources for alternative purposes. We strive to be good stewards of our community by donating 1% of our time to local causes as part of our corporate culture. One aspect of fast growing startups that isn’t talked about enough is how the faster you grow, the more cash the business demands. Instead of being cash generating machines, fast growing startups are cash eating machines.
Here are some reasons fast growing startups need even more cash than normal:
- Great employees take time to find and train, so the faster the business grows, the more employees you need to hire in advance to meet future demand, causing a cash burden in the interim
- Adding experience and expertise to the leadership team often operates as a step function such that you hire managers that are compensated for managing a much larger team, even though your team hasn’t grown to that size yet (e.g. you hire a CFO with experience in a 200 person startup even though you only have 50 so far)
- Office space and commercial real estate in general aren’t flexible such that you have to get the amount of office space you expect to need at the end of the lease term at the beginning, and pay for the unused space throughout (try to negotiate to grow into the space)
As a general rule of thumb, the faster the startup is growing, the more cash it is consuming, especially early on. As the business matures and starts to generate more economies of scale, then it starts making more money and transitions from a cash eating machine to a cash generating machine.
What else? What are some other reasons why fast growing startups are cash eating machines?