Entrepreneurs are an optimistic bunch. Just the nature of building something from nothing lends itself to people that believe they can figure things out (high locus of control). After investing in over a dozen startups, I’ve encountered a phenomenon that makes sense but wasn’t apparent before: entrepreneurs almost always burn the new cash in the bank in 18 months. Whether the entrepreneur raises $300,000 or $3 million, 18 months later the cash is gone.
Here are a few thoughts on entrepreneurs burning new cash in 18 months:
- When looking at cash on hand and monthly burn, it’s critical to identify the necessary metrics that will enable the next round of funding, or get to cash flow breakeven
- It’s important to decide if the number of days of cash on hand is shared internally
- Recognize that if the startup is pre product/market fit, it’s a different equation — everything is about finding 10 unaffiliated customers that love the product, and that often takes longer than expected
- Remember that lean startups are better than heavy startups
Entrepreneurs have big dreams, and after raising money, almost always spend the cash in 18 months. Entrepreneurs would do well to recognize this and plan accordingly.
What else? What are some more thoughts on entrepreneurs almost always burning new cash in 18 months?