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Wednesday, April 17, 2024

Today's Startups Are Flush With Cash—and Watching Every Penny

Liz Giorgi expected she would raise more money for her startup, Soona, in April. But when she saw how much money was sloshing around the startup world, she decided to go for it sooner. Giorgi started meeting with venture capitalists in October, a full six months ahead of plan, while her startup still had enough cash to fund its operations for another year.

By New Year’s, Giorgi had landed $35 million, adding to the $18 million Soona had raised previously. The cash is meant to last for another two years while Soona, a virtual photo studio, builds a sales strategy and adds product offerings. “There's a version where I can stretch it to two and a half or even three years,” Giorgi says, by spending more conservatively. That runway is meant to ensure Soona can grow before it needs to raise money again, when the market might not be so peachy. “This is the thing, and it's the question every founder is asking themselves,” Giorgi says. “Can this frothy market last?”

Investor enthusiasm has buoyed the startup ecosystem for the past few years, as valuations and average funding rounds reached new heights. As investors write bigger checks, many founders have taken advantage, taking on huge investments that significantly extend their startup’s life.

Kruze Consulting, an accounting firm that works with more than 600 venture-backed startups, says its clients now have $5.42 million in cash, on average. “I’ve never seen that,” says Healy Jones, a VP at Kruze. For comparison, in 2018 Kruze’s clients had an average of $3.27 million in cash. While the bank balances are bigger, Jones says that startups have also trimmed spending: Kruze’s clients expect their cash balances to last them 26 months, on average. That’s more than twice as long as the 12-month average in 2018, with only about 65 percent more cash.

In decades past, a large investment round gave founders license to rent a stylish office, throw a big party, or launch a brand-awareness campaign. Today’s startups are significantly more frugal. “We are being really conservative with burn,” says Alexandra Moser, the COO of Clockwise, a calendar-optimizing startup that raised $45 million in January. Clockwise, like other workplace software, saw a huge uptick in use during the pandemic. But Moser says she and her team have been cautious about how long the boom times will last. While assessing the startup’s budget, Moser says, the company cut back on “unnecessary” expenses like branded swag.

Other startups have given up bigger expenses, like their offices. Before the pandemic, Jones says, the startups he worked with at Kruze spent an average of $45,000 per quarter on rent. Now, he says, “less than half of our clients pay rent.” The savings have significantly slowed the rate at which those companies are “burning” cash and freed them to spend more on other parts of their businesses.

There are, of course, some expenses that startups can’t avoid—chief among them, employees. The primary expense for early-stage startups is people, and people have become a lot more expensive. Jones, from Kruze Consulting, says startups are paying 20 percent more for engineers than they were a year ago. “The labor market is really tight,” says Eric Tarczynski, the founder of the VC firm Contrary Capital. Startups in his portfolio are spending “meaningfully more” on hiring than they were a few years ago and face more competition for coveted candidates.

“The compensation for software engineers is ratcheting up as we speak,” says Matt Soule, the founder of Parallel Systems, which makes self-driving battery-powered rail vehicles. “It’s almost becoming capital-intensive just to hire talent.”

Parallel raised $50 million in January. A considerable amount of that money is going toward expanding the team, hiring dozens more engineers. Soule says that in the current hiring climate, mid-career software engineers can expect a salary of $200,000 or more. Experienced engineers can receive more than $400,000 cash, plus equity—often more than $1 million in total compensation. “It is a challenge to stay current on what ‘market’ is since the competition is so fierce,” he says. “Money is getting thrown at in-demand candidates to close them.”

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The cost of talent has prompted some startups to cut expenses elsewhere. When Giorgi and her cofounder made their 2022 budget, they had originally included the cost of a bigger office to fit the team of 110 people in Denver. “We budgeted about $60,000 a month,” she says. Eventually, they gave up on the office and downsized to four rooms in a coworking space, which people can use for brainstorms and to record training and tutorials. It completely changed the budget: “We're saving between half a million and a quarter million a year.”

With those savings, Giorgi has all kinds of plans to improve Soona’s product. But first, she decided to give every employee a 10 percent raise. “It was the single-most expensive thing that my cofounder and I put in our 2022 budget,” she says. “But we thought, if we could make the single-most effective decision with this new round of capital, what would it be?” The answer they arrived at was talent—the only thing better than money to extend your startup’s lifespan.

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