Tomorrow is December 1st, the official start of annual budgeting season for startups. Big companies start their annual plans in the late summer/fall but there’s typically too much uncertainty for startups to plan their next year more than a month or two in advance. But right around now, all my portfolio company board meetings get consumed with questions like: “What are we going to try to achieve next year? What will our plan of record look like? How much will we burn in our quest to get to that next valuation inflection point?”
In the dynamic world of seed-stage startups, aligning your budget with your strategic goals is paramount. I like to tell my founders that your budget is your strategy, and your strategy is your budget. In other words, the budgeting process is not just about numbers; it’s a reflection of your company’s strategy and objectives. So here’s a guide for founders on how to create an effective budget for 2024, with a special focus on how generative AI can revolutionize this process.
- Aligning Budget with Strategic Goals: Start by outlining your long-term strategic goals. This should be a concise document (say, 2–3 pages) focusing on your vision, mission, and key objectives for the next three years. The 2024 budget should then be crafted to directly support these strategic goals. Remember, every dollar spent should move you closer to these objectives.
- Setting Clear Objectives: Define 4–6 measurable objectives for 2024, ensuring they align with your broader strategy. A useful framework here is the SMART criteria — Specific, Measurable, Achievable, Relevant, and Time-bound. John Doerr’s excellent book Measure What Matters, which dives into the OKR method pioneered by Google, is another methodology. Whatever method you decide to embrace, clarity of objectives will guide your product development, marketing, and growth activities.
- Revenue Forecasting: Develop realistic monthly revenue projections. These should be grounded in past performance, market analysis, and realistic growth expectations. Use the underlying drivers of revenue to avoid overly optimistic assumptions. For a B2C startup, that might mean app downloads, conversion rates, and retention rates. For a B2B startup, that might mean the number of qualified leads (iteratively developed based on a marketing budget assumption), free trial conversion rates, Average Contract Value (ACV), churn or Net Dollar Retention (NDR), and perhaps a sense of sales rep quota coverage if you have a nascent sales team.
- Expense Planning: Determine your acceptable budgeted loss for 2024, balancing it against your expected gross margin contribution from your revenue forecasts. This element is also very iterative — ask yourself if you’re losing too much money before you hit the key milestones that will unlock the next round of funding at a stepped-up valuation (i.e., the all important Startup Valuation Inflection Point). Prioritize spending towards activities that directly contribute to strategic objectives and always keep a buffer for unforeseen expenses or opportunities. When I was a founder, a CEO mentor of mine described this part of the process as the art of figuring out how to shove ten pounds of crap into a five-pound bag. For some reason, that metaphor has stuck with me!
- Team Engagement: Involve key team members in the budgeting process. Don’t be that hero founder who dictates everything to their team and then gets frustrated at the end of the year when you miss the numbers and you learn that the underlying, detailed assumptions were all wrong relative to the team’s point of view. Getting the team engaged will not only aid in realistic planning but also foster a sense of ownership and prepare them for autonomous execution throughout the year. That said, startup budgeting is not a bottoms-up exercise. You have to have a clear vision for what you’re trying to achieve and push your team to hit milestones that they might not think possible. That’s a delicate balancing act that every founder must figure out based on their culture and style but I like it when founders push their teams to “stretch but don’t break”.
The Impact of Generative AI on Budgeting: Generative AI can significantly impact the budgeting process and potential cost savings. It can streamline software development, reducing time and labor costs. AI tools can also assist in more accurate forecasting and scenario modeling, making budgeting more efficient and less prone to human error. The potential cost savings from leveraging AI in these areas can be substantial, allowing startups to allocate resources more effectively. Build in a stage in the process to push your team on this question (e.g., if we are using Github co-pilot effectively, why can’t our feature velocity be 2x what it was in 2023? if our RFP response process is more automated and quality controlled with the help of genAI, can our win rates improve by 20%? Can our response volume increase by 20%?)
Bottom Line: Budgeting for a seed-stage startup is not just about momentum planning. Instead, it’s a strategic exercise that requires careful thought and alignment with your company’s long-term goals. Incorporating generative AI into this process can offer significant efficiencies and cost savings, allowing you to focus more on growth and less on the intricacies of financial planning. Remember, a well-planned budget is your roadmap to success.