Liz Giorgi expected she was set to raise more money for her startup, Soona, in April. But when she saw how much money was sloshing around in the startup world, she decided to go for it earlier. Giorgi started with venture capitalists in October, a full six months ahead of schedule, while her startup still had enough cash to fund its operations for another year.
By New Years, Giorgi had raised $35 million, on top of the $18 million Soona had raised earlier. The money is meant to last another two years while Soona, a virtual photo studio, develops a sales strategy and adds product offerings. “There’s a version where I can extend it to two and a half or even three years,” Giorgi says, by spending more conservatively. That runway is meant to allow Soona to grow before it has to raise money again, when the market may not be so rosy. “This is the thing, and it’s the question every founder asks themselves,” says Giorgi. “Can This Frothy Market Hold Up?”
Investor enthusiasm has boosted the startup ecosystem in recent years as valuations and average rounds of funding hit new heights. As investors write bigger checks, many founders have taken advantage of this and made huge investments that significantly extend the life of their startup.
Kruze Consulting, an accounting firm that works with more than 600 venture-funded startups, says its clients now have an average of $5.42 million in cash. “I’ve never seen that,” said Healy Jones, a VP at Kruze. By comparison, in 2018 Kruze’s customers averaged $3.27 million in cash. While bank balances are bigger, Jones says startups have also cut spending: Kruze’s customers expect their cash balance to last an average of 26 months. That’s more than twice as long as the 12-month average in 2018, with only about 65 percent more cash.
In recent decades, a major investment round has licensed the founders to rent a stylish office, throw a big party or launch a brand awareness campaign. Today’s startups are significantly more economical. “We’re very conservative with burn,” said Alexandra Moser, the COO of Clockwise, a calendar-optimizing startup that raised $45 million in January. Clockwise, like other workplace software, saw a huge surge in usage during the pandemic. But Moser says she and her team have been cautious about how long the boom will last. While assessing the startup’s budget, Moser says, the company has cut back on “unnecessary” expenses like brand swag.
Other startups have given up larger expenses, such as 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 customers pay rent.” The savings have significantly slowed down the rate at which those companies “burn” cash and have given them the freedom to spend more on other parts of their business.
There are, of course, a number of costs that startups cannot ignore – the most important of which are employees. The primary cost for early stage startups is people, and people have gotten a lot more expensive. Jones, of Kruze Consulting, says startups are paying 20 percent more for engineers than a year ago. “The job market is very tight,” said Eric Tarczynski, the founder of VC firm Contrary Capital. Startups in his portfolio are spending “meaningly more” on recruiting than they were a few years ago and are facing more competition for coveted candidates.
“The compensation for software engineers is getting higher and higher right now,” said Matt Soule, the founder of Parallel Systems, which makes self-driving battery-powered rail vehicles. “It becomes almost capital intensive just to hire talent.”
Parallel raised $50 million in January. A significant portion of that money will go toward expanding the team and hiring dozens of additional technicians. Soule says that in the current hiring climate, mid-career software engineers can expect to earn a salary of $200,000 or more. Experienced engineers can receive more than $400,000 in cash, plus equity – often more than $1 million in total compensation. “Keeping abreast of what ‘market’ is is a challenge as the competition is so fierce,” he says. “Money is being thrown at high-demand candidates to shut them down.”
