Founders and startup operators
A founder makes the same decisions as a consultant, but with far less data and their own company's cash at risk. This lesson covers unit economics, runway and the order of steps. Its worked example asks whether to hire salespeople now.
Key takeaways
- A founder answers the same questions as any strategist, about customers, price, costs and growth.
- Write the maths of the goal.
- Use what you know about the business.
Key idea
A founder answers the same questions as any strategist, about customers, price, costs and growth. But a founder has little data, little time and money that runs out. The skill is to estimate, test cheaply, and do things in the right order.
What follows describes common patterns, not any one employer's process, unless a source is named. Steps differ by company, country and level and change from year to year. Read the job advert and the employer's own careers page for the exact steps.
Founders do not sit a case interview. They meet investors instead. Investors ask how the company makes money, how big it could get, what each customer is worth and how long the cash lasts. That meeting works much like a case interview. Startups also hire operators, in roles often called business operations, strategy and operations, or founder's associate. These roles commonly use a take-home problem built on the company's real situation, followed by a discussion. This is a general pattern, and startups differ widely.
The five moves, as a founder
- 1Pin the question. What must be decided this month (hire, price, channel, raise money) and how many months of cash are left?
- 2Write the maths of the goal. Work out what one customer earns each month after direct costs, and what it costs to win them. Then work out how long until they pay that cost back. Last, work out how long the cash lasts at today's spending.
- 3Use what you know about the business. Which business model is this, and what do similar companies' numbers look like? Use those numbers as a starting estimate, and say so.
- 4Find the facts that decide it. You will not have years of data, so run small, fast tests: ten customer calls, a price test on the next twenty sign-ups, one month of a new channel.
- 5Say so what. The decision, the test that would change it, and the point at which you stop.
What is different from a consulting case
- Unit economics with little data. Early numbers are noisy. Use ranges, and decide which number would change the decision.
- Sequencing. The right order matters more than the right list. First build a product customers keep. Then find a sales channel that pays back. Then hire to grow it.
- Runway. Burn is how much more the company spends than it earns each month. Runway is cash in the bank divided by burn, and it is a hard deadline. Growth that pays back only after the cash runs out can close an otherwise healthy business.
- Reversible and one-way decisions. Move fast on decisions you can undo, such as a price test. Slow down on ones you cannot undo, such as a long lease or senior hires.
Worked case
A software startup wants to hire two salespeople now
The prompt
Fictional and illustrative. A startup in Singapore sells booking software to clinics for SGD 300 a month. Its gross margin is 80 percent. Winning a clinic costs SGD 3,600 in sales and marketing. About 2 percent of clinics cancel each month. It has SGD 900,000 in the bank and spends SGD 75,000 more than it earns each month. The founder wants to hire two salespeople at SGD 12,500 a month each. Should they hire now?
The structure
- Does growth create value, and can the company afford it before the cash runs out?
- Value of a customer: monthly contribution, payback time, lifetime contribution against the cost to win
- Cash: months of runway now and after hiring
- Ways to shorten payback before scaling
Working it through
1. Monthly contribution per clinic
The SGD 300 price at an 80 percent gross margin.
Monthly contribution per clinic (SGD):300 × 0.8 = 2402. Payback
The cost to win a clinic divided by its monthly contribution.
Months to pay back the cost of winning a clinic:3,600 ÷ 240 = 153. Lifetime contribution
With 2 percent cancelling each month, a clinic stays about 1 divided by 0.02 months on average. Multiply by the monthly contribution.
Lifetime contribution per clinic (SGD):240 ÷ 0.02 = 12,0004. Lifetime value against cost to win
Lifetime contribution divided by the cost to win a clinic.
Lifetime contribution / cost to win (times):12,000 ÷ 3,600 = 3.335. Runway today
Cash divided by monthly burn.
Runway today (months):900,000 ÷ 75,000 = 126. Runway after hiring
Add two salaries of SGD 12,500 to the monthly burn.
Runway after hiring (months):900,000 ÷ (75,000 + 2 × 12,500) = 9
The recommendation
Do not hire the two salespeople yet. Over its life, each clinic is worth about 3.3 times what it costs to win, so growth creates value. But it takes 15 months to earn back the cost of winning a clinic. The company has only 12 months of cash, or 9 after the two hires. More sales now would spend cash that comes back only after the money has run out. First shorten payback. Offer the next 20 clinics a year paid in advance, with a small discount. Also try a cheaper channel, such as referrals from existing clinics. Hire once payback falls below about 9 months, or once new funding is agreed.
Risks: The 2 percent monthly cancellation rate rests on little history; A rival may win the market while the startup waits.
Next steps: Test a year paid in advance on the next 20 clinics; Start funding conversations now, since raising money takes months.
Using this in the interview or investor meeting
- Ask: how much cash, how much burn, what does one customer earn and cost, and how quickly do customers leave?
- Calculate: monthly contribution, payback, lifetime contribution against cost to win, and runway before and after the decision.
- Say: the decision, the order of steps, the test that would change your mind, and when you would stop.
A startup's customers are worth three times what they cost to win, but payback takes longer than its runway. What is the main risk of growing fast now?
Which decision should a founder make fastest?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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It builds on what you just read, in The same acumen in other roles.
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