An earlier budget mistake that will ruin your company

 

Ben Horowitz put out an informative post entitled How to Ruin Your Company with One Bad Process. It explains how a naive budgeting process--one where you empower department heads to propose their own budgets without global constraints--will create perverse incentives and result in sub-optimal outcomes. At the earliest stages, startups don't have this problem yet because they simply don't have the money and headcount to even encounter it.

For seed-stage startups, there is another similarly perilous budgeting mistake that unfortunately happens all the time. It's not budgeting enough for getting traction. This is the number one traction mistake.

Here's how it ruins your company. You raise a nice seed round to get your product to market. You start hiring developers and designers and all of a sudden your burn rate is significant. Product development takes longer than you thought, bringing up all sorts of issues that you never thought of initially. Beta testing brings up even more issues and delays your launch by many months. Finally you have something pretty awesome that customers love -- the launch is a success!

Problem is your runway is now short and you need some traction to raise your next round. Feedback and beta customers are positive but there is no hockey stick. You start taking getting traction seriously but it is too late. The startup world is littered with failed startups (and financings) with this fact pattern.

The better scenario is you were spending about half your time on getting traction. You used a systematic approach like Bullseye (that we lay out in Traction Book) to figure out what traction channel to focus on. Your launch was planned in advance to incorporate this channel and upon launch you hit the ground running. Your growth curve looks awesome and you find raising your next round relatively painless. You correctly remembered that traction trumps everything and budgeted enough of your time and money towards getting traction.

 

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