I expected Liz Georgi She would have raised more money for her start-up, Sona, in April. But when she saw how much money was flowing all over the startup world, she decided to go for it sooner. Giorgi began meeting with venture capitalists in October, a full six months before the plan, while her startup still has enough cash to fund its operations for another year.
By the new year, Giorgi reached $35 million, on top of the $18 million that Soona had previously raised. The money is supposed to last another two years while virtual photo studio Soona builds a sales strategy and adds product offerings. “There is a version where I can extend it to two and a half or even three years,” Giorgi says, by spending more conservatively. This runway is meant to ensure Soona grows before you need to raise money again, while the market may not be too peachy. “Here’s the thing, and it’s the question every founder asks himself,” says Giorgi. “Can this frothy market last?”
Investor enthusiasm has boosted the startup ecosystem over the past few years, as valuations and average funding rounds have reached new heights. As investors write bigger checks, many founders have benefited, making huge investments that dramatically extend the life of their startup.
Kruze Consulting, an accounting firm that works with more than 600 project-backed startups, says its clients now have an average of $5.42 million in cash. “I’ve never seen that before,” says Healy Jones, vice president at Cruise. For comparison, in 2018, Cruise customers averaged $3.27 million in cash. While bank balances are larger, Jones says startups have also cut back on spending: Cruise customers expect their cash balances to last an average of 26 months. That’s more than double the 12-month average in 2018, with a cash increase of just 65 percent.
In the past decades, a big investment round has given founders a license to rent a tidy office, throw a big party, or launch a brand awareness campaign. Today’s startups are significantly more economical. “We’re really conservative about burnout,” says Alexandra Moser, chief operating officer of Clockwise, a calendar improvement startup that raised $45 million in January. Clockwise, like other workplace software, has seen a massive increase in use during the pandemic. But Moser says she and her team have been cautious about how long the booms will last. While evaluating the startup’s budget, Moser says, the company cut “non-essential” expenses such as branding booty.
Other startups have given up on bigger expenses, like their offices. Before the pandemic, Jones says, the startups he worked with at Cruise spent an average of $45,000 per quarter on rent. Now, he says, “less than half of our customers pay rent.” The savings significantly slowed the rate at which these companies “burn” and freed them from spending more on other parts of their businesses.
There are, of course, some expenses that startups can’t avoid — and on top of that, employees. The primary expense for early stage startups is people, and people have become much more expensive. Jones, of Kruze Consulting, says startups are paying engineers 20 percent more than they did a year ago. “The job market is really tight,” says Eric Tarczynski, founder of VC Contrary Capital. The startups in his portfolio are spending “meaningfully more” on hiring than they were a few years ago and are facing more competition for desirable candidates.
“Software engineers are increasingly being compensated as we speak,” says Matt Sully, founder of Parallel Systems, which makes battery-powered, self-driving railcars. “Recruiting talent is almost capital intensive.”
Parallel raised $ 50 million in January. A large amount of this money is allocated to expanding the team, hiring dozens of other engineers. In the current employment climate, mid-career software engineers can expect a salary of $200,000 or more, Sully says. Experienced engineers can receive more than $400,000 in cash, plus equity — often more than $1 million in total compensation. “It’s a challenge to stay on top of what the ‘market’ is like because the competition is so fierce,” he says. “Money is being dumped on wanted candidates to close them down.”
Today’s startups are full of money — and they’re watching every penny
Source link Today’s startups are full of money — and they’re watching every penny