Burn Creep: The Silent Threat to Early-Stage Company Runways

In the world of early-stage SaaS and services companies, maintaining a keen eye on budget allocations and cash flow is not just good practice—it's a survival tactic. Here, I'd like to introduce a concept that every CEO of an early-stage company should be wary of: Burn Creep. This phenomenon can silently undermine the financial health of your company, similar to the more well-known issue of "scope creep" in project management.

What is Burn Creep?

Burn Creep occurs when small, seemingly insignificant expenses gradually accumulate in a company's expense base. These additions might appear harmless or justifiable on their own—think slight increments in software subscriptions, a marginal increase in marketing spend, or an extra hire that wasn't in the initial headcount plan. However, collectively, these expenses can significantly increase the monthly net burn rate.

Burn Creep vs. Scope Creep: A Comparative Look

To better understand burn creep, it's helpful to draw parallels with scope creep, a common challenge in project management. Scope creep involves uncontrolled changes or continuous growth in a project’s scope, often without adjustments to time, cost, and resources. This leads to projects overrunning their budgets and deadlines.

Similarly, burn creep in the financial management of an early-stage company involves gradual growth in spending that hasn't been adequately planned for. Both phenomena start small and grow under the radar until they pose significant risks to the project or company's health.

Implications of Burn Creep

The primary danger of burn creep is its impact on a company's financial runway. For early-stage companies, the runway is how long they can operate before needing additional funding. It is crucial for reaching milestones that justify the next round of fundraising at a favorable valuation. When burn creep occurs, the company’s runway shortens unexpectedly. Early-stage companies may find themselves needing to secure additional funds sooner than anticipated, often under less favorable terms, or worse, unable to reach critical milestones.

Strategies to Mitigate Burn Creep

• Rigorous Budgeting: Implement a budgeting process where every expense must be justified against its expected benefit. This limits extraneous costs that can add up unexpectedly.
• Regular Financial Reviews: Conduct monthly financial reviews to monitor and discuss any deviations from the budget. This helps in catching burn creep early before it significantly impacts runway.
• Cost Conscious Culture: Encourage a culture of cost-consciousness across the company. When every team member understands the impact of expenses on the company's runway, they are more likely to seek value and efficiency in their operations.‍
• Stagger Charts: Stagger charts show the company’s final cash forecast changes over various points in time. By comparing the updated cash forecast to the forecast from prior months, the company can start to see trends in changes in runway and illuminate burn creep in the company’s expense base. See an example of a stagger chart below.

Conclusion

For CEOs of early-stage software and services companies, awareness of and vigilance against burn creep can make the difference between thriving and surviving. As with scope creep, the key to managing burn creep is proactive planning and continuous oversight. By keeping a close watch on how small expenses add up, CEOs can safeguard their company's financial health, ensuring they have the runway needed to grow, innovate, and attract further investment on favorable terms.