Just got a round of funding for your startup? Congratulations! 🥳
Getting startup funding can be exhilarating after all the hard work and challenges of trying to pitch tons of investors to trust in your vision and business growth potential.
But now that you’ve got their buy-in, how can you make sure the investment they entrusted you with is spent wisely, so that it will yield the returns you promised?
One of the most important decisions a startup has to make is how to balance burn rate and runway. Imprudent spending could see your funds quickly dip into negative territory, and all your hard work will be in vain.
In this article, we’ve compiled some smart, founder-recommended ways of spending startup funding, so that you can:
Achieve high-leverage returns for lower costs
Maintain the respect and trust of your investors (crucial if you plan to raise another round of funding)
Continue on the growth path your company
Avoid insane burn rates
Extend your runway
Let’s get to it.
Talent & Team Members
There is no doubt that talent is at the heart of startups. Incidentally, employee wages take up the largest piece of the funding pie, with some startups' wages reaching 50% of their overall burn rate. Therefore, reducing your labor costs should give you the most bang for your buck when it comes to managing startup costs.
Hire Wisely
One of the most common reasons startups raise money is to hire. It's made even more difficult by the fact that you're often hiring for roles that don't exist yet in your organization. Hiring in phases is a smarter move, and better than bringing on a wave of new positions all at once. By doing so, you will be able to assess the impact new roles will have and identify where the gaps exist.
According to Glassdoor, the average U.S. employer spends roughly $4,000 and 24 days to hire a new worker. Aside from the fact that attracting top talent is tough in today’s fierce labor market, the hiring process involves other activities that add to the difficulty of hiring new team members. Just take a look at all the hoops a candidate has to pass through.
Vetting resumes
Job vacancy posting
Headhunting
Interview rounds
Contract signing
Onbording
When Should a Startup Be Hiring
The answer depends on factors like your workload, burn rate, runway, product development stage, and operational needs. As a general rule of thumb, new hires should either help the business make more money OR help the business save more money. Startups need to keep as lean as possible, especially during the Series A stage. But beware of running your team too thin that may result in employee burnout.
Here are some of the scenarios that might see the need for additional hands on deck.
Your cash flow allows you to take on this employee for 1 year with no problems.
Your customer service is lacking; tickets are piling up and complaints/bugs are piling up.
Team members running out of bandwidth due to the volume of work.
There seems to be no end to tasks that could otherwise be delegated to someone else.
Start With Key Positions in Your Team and Slowly Build-out
As your startup begins scaling up, more people will be needed to handle expanding areas of the business. One of the biggest mistakes eager startups make after getting funded is to go on a shopping spree for new team members, oftentimes ending in insane burn rates, and unfortunate layoffs because they weren’t really needed in the first place.
As you calculate your employee budget, keep these two things in mind. First, you need to know how much you should pay yourself and any co-founders. The second is the cost of employee benefits, which can quickly add up. Start with a thorough assessment of your needs and build your team out from a basic roster of core employees then slowly branch out. Ideally, these core team members must not have any problems wearing different hats when first starting out while the startup team is still taking shape.
These are the typical key team members you should consider having:
Chief Executive Officer
Chief Operations Officer
Chief Technology Officer
Chief Marketing Officer / Growth Marketer
Chief Financial Officer
Product Manager
Business Development Manager or Chief Revenue Officer
Customer Service Team / Office Administration
Average Annual Salaries for Companies in the Seed Stage / Start-ups
Position | Average Salary | Additional Information |
Chief Executive Officer | $100,000 - $ 125,000 | A startup company will be more likely to succeed if the CEO’s salary is lower because it sets the salary cap for everyone else. |
Chief Operations Officer | $ 69,000 - $ 96,000 | Aside from salaries, startup companies can offer higher business equity grants to compensate for lower pay. |
Chief Technology Officer | $36,000 - $ 50, 999 | CTOs are in charge of the overall technology strategy. A technology-focused company will rely more on CTOs than any other company role. |
Chief Marketing Officer / Growth Marketer | starts around $ 48,000 | Before hiring a CMO, startups should have at least 10 people on the marketing team. |
Chief Financial Officer | $ 67, 000 - $ 87, 499 | CFO salary ranges depend on several factors such as company size, CFO qualifications, years of experience, and location. The highest paying U.S. state for CFOs is Washington while the lowest paying is North Carolina. |
Product Manager | $38, 500 - $ 51, 499 | A product manager helps tech startups have a more predictable market and assure viable product development through time. |
Business Development Manager / Chief Revenue Officer | starts from $ 51,000 | CROs are expected to create scalable and repeatable sales revenue. For startups, they catalyze advertising strategies and assure customer satisfaction. |
Customer Service Team / Office Administration | starts around $35, 251 | Good customer service is cheaper than running ads and is especially important to startup companies. |
Outsource To Reduce Costs and Maximize ROI
Hiring, just like fundraising, is very competitive. It takes more than just a cool office with a pool table, office dog, and espresso machine to attract top talent to your startup. Attracting talent is just one problem area, then there’s the sky-high wages. More and more employees are now demanding higher salaries, and companies are taking the bait. For example in the Bay Area, the average salary for a software engineer is $154,000. That’s for just one employee.
It’s no secret that big tech companies like Google, and Apple heavily outsource their business operations to leverage high returns and cost-efficiency. According to a study conducted by Deloitte, about 64% of companies consider cost savings as their primary driver for outsourcing.
Benefits of Outsourcing
Lower operating costs - IT companies have reported about 60% savings through outsourcing
Access to an extremely competitive global talent pool
Fast deployment and established expertise mean less time managing and onboarding people
Zero employee overhead expenses such as mandatory benefits and leave allowances
Companies like B Capital Group, Thunes, United Nations, and FWD Insurance have reaped the benefits of outsourcing by leveraging the services we provide at The Scalelab. We do the heavy lifting for them by consistently producing sales-qualified leads that increase their pipeline value, and ultimately, their revenue.
Sample Cost Table of In-House Hiring vs Outsourcing
| In-house Hiring | Outsourcing |
Cost per Hire | $4200 | $1000 |
Benefits | $6500 | $0 |
Software License | $250 per person | $0 |
Overhead | $5000 | $0 |
(Salary) Accounting - Controller | $100,000 / year | Outsourced accounting - $30,000 / year |
(Salary) Accounting - Director | $ 125,000 / year | Outsourced finance - $24,000 / year |
(Salary) CFO | $ 425,000 / year | Outsourced CFO - $36,000 / year |
Best for: | Projects with stable workloads, bigger budgets and companies trying to build their culture | Unpredictable workload, limited number of talents, cost reduction and improved speed |
Conclusion:
Outsourcing is a cost-effective option for start-up companies because it provides flexibility in the mode of work, cuts costs on training and recruitment, allows access to expert talent, and is open for faster project delivery time.
Technology
Technology is the core of a startup, and your tech suite is another crucial area in your list of startup expenses. Investing in tech is crucial as it allows companies to scale for minimal cost. The rise of SaaS and cloud computing has made it easier for companies to improve their business processes and overall productivity.
How Companies Leverage Technology To Save Costs
According to research from The Hackett Group, companies that spend 3% more on tech saved up to 29% in overall costs
Swiss insurance company Baloise saves 700 hours annually because of automation software
Sales intelligence platform Apollo saw an immediate 50% increase in inbound meetings booked on their site by using Chili Piper, an inbound scheduling SaaS company
Over here at The Scalelab, we leverage sales software like LinkedIn Sales Navigator to identify thousands of leads in fewer days. Once these leads are found, we like to use Lemlist for our email marketing, and cold outreach efforts. Related: See how we use these tools to create the perfect lead generation framework to consistently generate B2B leads.
Create a Must-have List
The right choice of software and tech has a huge impact on your ability to manage your growing business. Getting the best tools for your startups can yield massive benefits such as increased business productivity and cost savings. We recommend checking out business software review sites like G2 and Product Hunt for your software shopping needs.
Don’t go crazy over that shiny thousand-dollar SaaS subscription that has 10+ features you will never need. The key is to understand what your exact needs are, and resist the urge to splurge on unnecessary features.
Here are the average prices you can expect when shopping for your startup’s tech tools.
Startup Software Tool Kit Average Prices |
Type | Per Month |
Domain Hosting | $50 - $750 |
Marketing Automation | $200 - $2000 |
Sales CRM | $12 - $300 per seat |
Team Communication | $3 - $10 per seat |
Customer Service Platform | $25 - $300 |
Project Management | $4 - $11 per seat |
HR | $100 - $3500 |
Finance / Bookkeeping | $9 - $999 |
Legal Counsel
As a startup, you deal with contracts and negotiations all the time. Be willing to pay for professional advice and you will reap its benefit in the long run. Because of the critical nature of business contracts, having a good lawyer on tap can help startups navigate through tricky and complex laws that govern everything from funding to operations.
Lawyer up and Avoid Headaches Down the Line
This is one of those things you want to get done sooner rather than later. You want to have all your contracts and documents reviewed by a lawyer to avoid costly legal implications. Invest in good advice from the beginning so that you don't end up with big legal settlement bills later on for issues such as incorporation paperwork or understanding liability issues. Your legal counsel will also help you review contracts, as well as make sure you are complying with the law in your startup.
Protect Your Intellectual Property
Intellectual property is defined as the company’s innovations in the form of copyrights, patents, and trademarks. If you feel like your startup is paving the way through an innovative solution, you might want to consider filing for your IP. In the absence of effective intellectual property protection, startups run the risk of intellectual property theft.
Benefits of Filing for an IP:
Claim exclusive rights to your creative innovations
Control how your tech solution is distributed
Build a reputation among the industry through trademarks
Facebook is a good example of what happens when intellectual property isn’t protected. The famous incident revolves around three of Mark Zuckerberg’s schoolmates, Cameron Winklevoss, Tyler Winklevoss, and Divya Narenda. The three former schoolmates accused Zuckerberg of stealing their idea resulting in a $65 million settlement that went against Mark Zuckerberg.
Top 10 Best Law Firms for Intellectual Property Rights
Law Firm | Description |
Fish & Richardson P.C. | Fish & Richardson P.C. positions itself as the leader in IT litigation. Fish’s trial lawyers are scoring more high-profile wins than other firms. |
Finnegan | Finnegan practices in every major area of IP including advertising, copyright, design rights, patent litigation, patent portfolio management, trademark, and post-grant proceedings. |
Kirkland & Ellis | Kirkland & Ellis is a wide-range international law firm that serves clients in private equity, corporate transactions, litigation, restructuring, and intellectual property rights. |
Cooley LLP | Cooley LLP practices in areas such as litigation, intellectual property, fund formation, financial services, employment, and public markets. |
Quinn Emanuel Urquhart & Sullivan, LLP | Quinn Emanuel Urquhart solely focuses on business litigation and arbitration. The law firm has already won more than $70B in judgments and settlements. |
WilmerHale | WilmerHale is a full-service international law firm but has a particular strength in intellectual property. It counsels a range of industries including aviation, big insurance, media and entertainment, and even national security. |
Wilson Sonsini | Wilson Sonsini positions itself as the go-to firm for clients from the tech industry. It specializes in business, securities, and intellectual property law. |
Morrison & Foerster LLP | Marrison & Foerster has 17 offices around the world and is one of the leading capital markets law firms. It has expertise in business and litigation and life sciences and technology. |
Irell & Manella LLP | Irell has been in business for more than 75 years and has helped thousands of clients develop innovative strategies to further their business goals. |
| Knobbe Martens is an innovation leader that provides service and representation in intellectual property and technology law through its 300+ lawyers and scientists. |
Litigation Pricing (Average)
Fee arrangements include:
Fixed fee
Blended rate
Collared fees
Holdback with Success Bonus
Contingency Fee & Hybrid Fee Arrangements
Fee for Patent:
Patent novelty search and opinion: $1,500
Provisional patent application: $3,500
Non-provisional patent application: $7,000 - $12,000
Preparing design patent application - $750
Fee for Trademarks:
Registrability search opinion - $1,000
Prosecution - $1,200
Statement of use - $450
Renewal application - $500
Appeal - $3,500
Fee for Copyrights:
Preparing and filling application - $350
Accounting
Accounting and bookkeeping are foundational to the health of your startup. Investors rely on your financial statements to gauge your overall performance. These financial statements also serve as indispensable decision-making tools to help your startup navigate its way when scaling up. Accounting helps you figure out how much cash runway you have, and how much budget you have for hiring.
Bookkeeping Services Cost Table
Prices for bookkeeping services depend on many factors. It could either be through locality, bookkeeper expertise, or your business’ actual needs.
By Locality | Industry-standard for bookkeeping services in the USA is at $23/hour. Bookkeeping Rates in the Different States [Average]
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By Bookkeeper Qualifications | Bookkeepers need to have more certifications to charge higher. These are examples of the certification programs you can look for in your bookkeeper:
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By Business Needs | Bookkeeping tasks vary and therefore bookkeeper rates will also vary.
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Hire or Outsource an Accountant To Stay On Top of Finances
In your startup’s case, a competent CFO is always your best bet for managing finances. As your startup grows, you want your executive team to focus on growing the business rather than managing it. Bookkeeping and accounting are extremely time-consuming activities that you should delegate to someone else. This is especially true during tax season.
A good accountant can do everything from tax planning to adjusting earnings per share assumptions. If a full-time role isn’t in the cards yet, then a part-time accountant or CFO would be fine. Also known as “drop-in CFOs,” these part-time professionals can provide on-demand services such as:
Prepare financial reports
Assist in tax compliance activities
Manage financial projections
Draft projections and documents for pitching potential investors
Office Spaces
So now that you’re staffing up, you’ll need somewhere to put your employees. On that note, ways of working have changed significantly because of the pandemic. Many knowledge workers have adopted remote working, saving costs for startups. Rent Costs for Office Spaces
The average cost for office space per square foot in the US is $8 - $23.
By Locality | Cities - Average Office Rent Cost (per sq foot)
|
By Number of Employees | A standard calculation would be X number of employees multiplied by 75 sq feet.
(10 x 75 sq feet = 750 sq ft office)
(15 x 75 sq feet = 1125 sq ft office)
(20 x 75 sq feet = 1500 sq ft office) |
Work From Home and Cowork on Certain Days
We’ve all seen those swanky startup offices with bean bags, a pool table, and a gym. Startups have been known to be creative when it comes to designing their office spaces which makes going to work a lot more enjoyable. But at this point, you’ve just raised your Series A, is it really worth getting a fancy office space or can the team still make progress while operating remotely?
Aside from incurring expensive operating costs, having an office will require furniture, such as desks and chairs, which can cost over $1k per employee annually. In addition, don't forget to factor in extra costs such as conference rooms and kitchens as your startup grows. According to a survey compiled by Founders Forum, 81% of workers prefer a hybrid setup with only 11% wanting to go remote full time and 8% returning to an office full time.
Let’s take a look at the benefits of working remotely:
Immediate time and cost savings for all
Enhanced productivity
Increased well-being and less travel-related stress
Despite all the benefits of working remotely, nothing beats working face-to-face when it comes to tackling critical problems and making pivotal business decisions. A hybrid work would give startups the best of both worlds. In this case, it's much more feasible to simply rent coworking spaces as compared to a fully leased office.
Advantages of using a coworking space:
Significant reductions in cost
No monthly upkeep and maintenance
Networking opportunities
No binding contracts and deposits
Marketing
Obtaining your funding comes at a price, the pressure is on you to prove your revenue model. Getting funded means showing investors that the investment in your startup was worthwhile. 82% of startups fail because of cash flow problems. It shows that minimizing the burn rate is just one piece of the puzzle, you also need to go on the offensive and focus on revenue-generating strategies to stay profitable.
Sample Content Marketing Budget Cost Table
Content Marketing Budget for: | Pricing |
Solopreneurs | Monthly resources: 20 hours + $1000
|
Small Business | Monthly resources: $5000
|
The Growth Startup | Monthly resources: $15,000
Content marketing manager, agency support, video specialist, graphic designer
|
The Enterprise | Monthly resources: $50,000
|
Leverage Email Marketing and 36X Your ROI*
Time is of the essence in your startup, and if you opt for inbound marketing like SEO marketing, you could look at anywhere from 4 to 12 months before you start seeing some traction. Even if they do manage to land on your website, there’s no guarantee that they’ll convert, according to Marketo, a massive 96% of website traffic is unlikely to convert.
Social media and search engine advertising are increasingly used by startups as marketing acquisition channels. According to Tech Crunch, ads rank as one of the largest expenses a startup incurs. However, the ROAS (return on ad spend) is only a paltry 2x, while direct marketing strategies like email marketing, in particular, are extremely cost-effective with an ROI of up to 36x for every dollar spent. Email marketing, when used effectively, is one of the most efficient customer acquisition channels for both B2B and B2C.
Email Marketing Benefits:
Lower operating costs compared to advertisements and content marketing
Scalable no matter how large the prospect pool is
According to the Direct Marketing Association, 66 percent of consumers purchased as a result of a marketing message received via email
According to 29% of marketers, email marketing is the most effective channel for marketing
In Europe, North America, and APAC, email marketing is the most widely used technology for customer engagement – 77.6% (compared to 62% for content marketing and 61% shown by social media marketing)
Email is 40% better at converting (compared to Facebook and Twitter)
Wrapping up
As a newly funded startup, it may be tempting to go on a shopping spree.You may feel the urge to spend without restraint. But if you want your business to survive this critical stage, it’s crucial to act responsibly and follow your company’s spending plan.
To recap on ways to manage your startup expenses:
Assess workforce requirements thoughtfully before you hire team members
Outsource to keep your expenses at a minimum
Invest in technology but exercise judgment when choosing your software
Seek legal counsel early to avoid problems later
Get an accountant, whether full-time or part-time, to get your finances in order
Working from home has more benefits than working in an office
Leverage email marketing for maximum ROI
Going back to investors soon after initial investment and asking for more funding is one of the worst things that can happen to your startup. That’s why it's so important to decrease the burn rate, and increase your earn rate.
Here at The Scalelab, we’ve helped dozens of companies increase both their earn rate and decrease operating expenses. We’ve increased our clients’ revenue by hitting their sales targets through well-crafted email marketing campaigns that generate consistent sales-qualified leads, every month.
Investing in a proven lead generation company like The Scalelab also keeps your manpower expenses at a minimum, there’s no overhead, training or setup required.