One of the soundest advice I’ve heard about startup finance is to act under the assumption that you will not be getting any more money from the outside. This is an applied example of what I will refer to as the rule of conservatism – The Roc.
Forecasting is notoriously difficult, and the outlook changes by the day. The way to remain robust in this level of uncertainty is to account for the worst, this is the rule of conservatism. It also presents itself under a more common saying:
Expect the best, prepare for the worst.
The rule can present itself as follows:
Scenario: We don’t know what our revenue will be the coming months
Optimism: Let’s assume 15% month over month growth, explain deviation after the fact
Roc: Operate under the assumption that it will be flat, adapt as it changes
Scenario: We expect to raise a new round in 9 months time
Optimism: Adjust costs to last 9 months
Roc: Assume it will not come – which combination of cost and revenue will get you to profitability under that limitation? If the financing comes, re-align according to new limitation.
Roc is a robust approach to startup finance as opposed to one that is fragile. In a fragile approach we’re taking risks that, however unlikely, spell the end of the company. In the midst of building a startup, it is easy to get caught up in the optimism that is fundamentally required for such a venture. Risks are present but not perceived, and 9 out of 10 startups fail.
This is the reality, but it’s not pre-destined. It’s a mixed result of biases and imitation which passes a flawed way of working on as admirable. Risk-taking of this sort is celebrated due to the elevation of its survivors.
Using The Roc, the downside is limited and the upside is essentially unlimited. If our optimistic scenario comes to fruition we will have made a lesser investment than what was possible and suffered suboptimal returns, but in many cases we can adapt quickly and the loss is limited. In our worst case scenario, we will gain the opportunity to try again, with the alternative of going under. With enough tries, and a maintained effort, failure becomes the exception, and success the norm. And let’s face it, we all need a Roc to lean on.
Oscar Holm 