The one big thing I’ve learned from being involved in tech start-ups is that the first person you should hire is a financial controller. You don’t have to have him or her as a full-time employee — usually a day a week is enough at the beginning. But what you need is someone who understands money, because most techies don’t understand it. The best financial controller we ever had maintained a constantly-updated spreadsheet which could tell us — to the day — when we would become insolvent if things continued on their present course.
In principle, insolvency is a simple idea: it’s when your liabilities exceed your assets. But what most engineers and company founders forget is that — if you’re behaving ethically — your liabilities include the cost of shutting down the company, ensuring that laid-off staff get whatever redundancy pay that’s due to them, and that your customers are not left in the lurch. In the UK context, that probably means you need at least £50k over and above the cash you’re counting on to give you the runway provided by your investors.
In one of the companies I was involved in, it took us much longer to get sales revenues than we expected — not because people didn’t like our product (they did), but because when you’re a new company sales take much longer to close, and therefore it takes much longer to get the resulting revenues flowing in. And if you’re doing hardware as well as software (and we were) then you have to remember that in order to make the hardware you have to put money up front — often three to six months ahead of delivery.
Which is why some fledgling companies are destroyed by a sudden big order. The large revenues that will in due course arise from those sales arrive long after you’ve had to put up the cash in to make the kit. And in the interval you can become insolvent — and then it becomes illegal to continue to trade unless you have been able to find ways of increasing your assets, either from investors, a bank overdraft or some other wheeze. So little companies sometimes go under because they’ve suffered what my old friend Roger Needham used to call a “success disaster”.
So it’s nice to discover that Trevor Blackwell has created an elegant interactive calculator which will tell you exactly how much runway you’ve got left. All start-up founders should consult it regularly.