When Tasso Roumeliotis started Location Labs in 2001, the dot-com collapse had left a smoking, desolate venture capital landscape in its wake. The founder, whose mobile security app business was acquired this past September for an estimated $220 million, remembers the carnage well. In fact, his first go at fundraising was so difficult that Roumeliotis made a vow that he wouldn't make the rounds again unless he absolutely had to — and that meant curbing burn rate.
“It was so dire, it took us so long, and the terms were so onerous, I didn’t want to raise money ever again,” he says. “We viewed every dollar as something sacred. That was our mindset from very early on.”
With his very tight-knit early team, Roumeliotis turned his conservative, cost-conscious approach to spending into a hallmark of Location Labs' culture. For the many startups trying to do the same thing today, he provides a template for the low-burn strategy that not only yielded a huge return, but made the company stronger in the process.
Know Your Essentials, Say 'No' to Everything Else
Even beforeRoumeliotis hit the fundraising trail, he knew that he was working in a tough environment and that frugality would be valued more than ever. Location Labs ended up building its first website for $1,500 and shopped the second-hand markets for furniture. When they finally closed their first round of $9.8M (out of an eventual $25.8 million),they heard from several investors that their commitment to slow burn was what sealed the deal.
So, once the money was in the bank, they weren't about to splurge.“I didn't have a fully-formed plan or anything, but I did say, 'Look, we're not going to go on a hiring spree just because we can,” saysRoumeliotis.“For two years, I said no to adding new positions. It was me playing the role of founder, CEO and product guy, a UI guy, one person managing all the office logistics from payroll to HR to admin, and a small group of engineers. That was it.”
To keep headcount low,Roumeliotis filtered all of their possible needs through the lens of the company's primary objective. At the time, Location Labs was all about determining whether consumers and mobile operators would want to buy their software. Everything depended on that. And as a result, rapid prototyping was paramount. Nothing else mattered.
“We stayed really low to the ground and made everything about efficiency until we won our first deal and revenue started to roll in,” he says.“When it came to hiring more engineers or a VP for this or that, I told myself, 'Don't even think about that until we have something that works."
Everyone was in one room every day. No managers. No overhead.
The Location Labs team was so picky about hiring that they would immediately nix anyone who said they had managed people in their previous job.“We knew management would only slow us down at that point,”Roumeliotis says.“People who have managed people before want to keep their careers growing in that direction. We needed people who would be with us at 2 a.m. committing code so that we could have it in front of AT&T the next day.In those early days everyone needs to be a market tester. Everyone should be building, testing or selling.”
To expand wisely,Roumeliotis leaned on what became known as the 'Scream Model.'
“We wouldn't hire somebody until one of the people we truly trusted — a cost-conscious employee or executive — would storm into the office and scream at me and the CTO, 'I need more people! This is bullshit!' Then we might consider it. But only when they really really needed it.”
AsRoumeliotis has seen from experience, your employees are always going to ask for more people.“It's a human instinct to grow a team. It makes people feel more powerful and secure and valued. But is it really essential to bring someone on? Is it worth the enormous costs associated with doing that? Will something fail unless we hire someone?”
Especially early on, hiring should be motivated by only two things, he says: Either your product will fail and shut down the business without them, or there will be a materially adverse change for the company.
Only good things came out of having hard constraints: Faster decisions, better hires, a shorter path to product-market fit.
Use Burn Rate to Build the Best Team
One of the best byproducts of Location Labs' thrifty beginnings is its core team. With the exception of one person, everyone in that early one-room shop is still with the company. The group that once spent Sunday afternoons hard at work together yielded the company's Chief Scientist, Director of Mobile Technology, and CTO.
“Great engineers are 10 times more productive than average engineers,” saysRoumeliotis. “If you hold out for the real elite talents, you can afford to compensate them so they won't leave. Give them the biggest challenges to solve, and you can get significantly more done with fewer people. That became a foundational mantra for the company.”
Keeping an eye on burn rate forced him to be clear about priorities and hire the people who would work best within that culture. It turned out that scrappiness is a good indicator of a lot of other great attributes: Accountability and grit chief among them.
“Some people we brought on wouldn't work out, and we'd know immediately within 2 weeks that they weren't keeping up,” he says.
When you're all working in one big room, everybody can see each other come and go. It becomes obvious who the outliers are.
The people who stayed longer are the ones who stayed with the company. Today, every VP and executive at Location Labs is someone who was promoted from within.
Charting a typical course, COO Joel Grossman started out as a summer associate from business school who was determined to learn as much as he could. When he graduated, he became the company's first VP of Product, and now he runs operations.
“When you have people who grow into leadership, they're more loyal and they come up through the ranks with a deep sense of ownership,” says Roumeliotis. “They care about the company as much as you do. They care about the little things and will work to make them great.”
Beating the slow burn rate drum didn't just helpRoumeliotis build a close team of high performers. It also championed a mindset that was all about resilience, teamwork and getting the most out of limited resources. A lot of this stemmed from him exemplifying these values at every turn.
“I would take the middle seat in coach bought on Priceline when we traveled to meet clients, and I would brag about it,” he says.“I wanted to send the message that there is tremendous pride in this approach.”
Along similar lines, the team was able to achieve just as much without a ton of newfangled tools or fancy ATS or CRM software.“We worked with everything open source and it forced us to find creative, cheap solutions for what we needed to do.”
Throw Out Your Budgets
This might sound counterintuitive, and Roumeliotis says his COO still gives him a hard time about it, but he refuses to set up budgets.
Here's the thing about budgets — they always get filled whether they should or not.
“If you tell people they have X amount of money to spend, they will find a way to spend it,” he says.“To this day, I fight any budgets for any part of the company. If you don't have one, then people's default is to be more conservative. It's like limitless paid vacation policies — people end up taking less vacation.”
The same thing goes for growing your startup. If you allocate a bunch of headcount, or set quotas for growth, everyone is going to pull hard to hit those numbers — even if they're unnecessary or don't make sense.“There's this dangerous mentality right now that either your company is growing or you're the living dead.” He advises startups to resist this trap.
“What I preached to the team was that we didn't have to grow fast — we had to grow appropriately. If you're growing fast just to say you're growing fast, you're just dumb. There are times — many of them — when you need to pause and reflect,”Roumeliotis says.“If you hire a bunch of people you need to stop, reflect, and spend time integrating them into your culture. Sometimes it takes a hiring freeze, but you'll be sorry if you don't slow down and make sure everyone you just hired is working out.”
Maintaining this attitude wasn't easy. In particular, it went against the message being sent by the company's investors.“The VCs were definitely pushing us to spend,” he says.“They kept saying, 'Hey, companies have VPs of operations, marketing, sales. You need them too!' I said no. And instead, I did all those roles myself to start, and it worked out fine while we were finding product-market fit.”
Keep Spending Top of Mind
Instead of creating budgets to keep your eye on your money, Roumeliotis advises entrepreneurs to keep close, everyday tabs on their burn rate.“It's shocking how many startup CEOs only check in on it when they have a board meeting coming up,” he says.“I've seen it happen many times when someone finally looks at how they're spending and they think, 'Oh wow, we're really overshooting.'”
How does this happen when there's so much cultural emphasis on burn rate? How can a CEO not know exactly how much money is coming in and going out?
“It's more common then you might think,” he says.“To say being a founder is a hard job is an understatement. You have to manage a team. Let's say you go on a recruiting spree and you're trying to match really competitive offers. You might end up paying 20 to 25% more than what you thought you would for 10 different people. Your burn rate goes way up. You're also trying to focus on the product and do what you need to there. All of a sudden six months go by and you think, 'Holy crap, we only have six months of cash left!'If you can only pay attention to two things, it should be your burn rate and your customer base.”
Your power as a founder is a function of whether you need money or not.
InRoumeliotis' opinion, founders should be looking at their burn rate constantly.“I would look at our burn rate every day and it was the most effective reminder when I was thinking, 'Do we need one more person to ship out product?' It was a clear signal that no, we didn't.”
When companies run out of money, it's almost always because people and process expenses got out of control and no one noticed.“If you don't look at what you have in the bank and what you're spending every day, you will hire a bunch of people that you'll eventually need to fire. And when you do that, it sends a massive negative signal to the market and your business starts to fall apart. It's a big negative feedback cycle.”
Because Location Labs was fanatical about recruiting smart and not too fast, the company has never experienced layoffs. This in turn has created a healthier environment of security, transparency, and loyalty between employees and managers.
Treat the Money as Your Own
“If you commit to thinking of every dollar you raise as your own, it completely changes your mindset,” Roumeliotis says.“It's also pretty true. You borrowed money from these people. That's exactly what happened.”
Imagine your mom and dad needing to sell their home so that you can pay back your investors. Suddenly, that money seems very real.
“When you raise seed money, you're probably actually taking some of it from family and friends,” he says.“So, when I started raising from VCs, I made an effort to carry that mentality over.”
This was helpful when it came to conservative spending, but it had some other benefits too.Roumeliotis says that his investors could see how much he valued the funding they gave him, and it elevated their opinion of him and the company.“I really believe the board can feel it, this trust that you're going to make exceptional use of their capital. Even if the company ends up failing, you're still the kind of entrepreneur that investors are willing to back again because you weren't wasteful.”
When you treat the money as your own, you're also more careful about every single deal you make, and you'll wait for the right one before moving into growth.
“We make sure we love a deal before we sign anything,” he says.“When this is the case, you will take the time to build something you know your customers will love. We would build custom prototypes to get AT&T and T-Mobile excited about our products because we wanted to work with them. We also pivoted a way from business models we didn't like really fast.”
In one case, Location Labs was building functionality very similar to another company called Loopt. Even though several carriers wanted them to keep developing the product, they decided to scrap the project and focus all of their energy on family location services — apps that would help parents know where their kids are, whether they were safe, etc.
“That ended up being a big home run,”Roumeliotis says.“You need to be able to really quickly determine whether a product has a chance at success. Your singular goal should be to run a market test. Is it the right product and can we get it to market in a cheap way? Can we acquire customers cheaply? All of those stars need to be aligned. If one star was off for us, we'd cut bait.”
On average, it would take just three months for Location Labs to test a product between ideation and beta launch. In that short time, they'd decide to invest more in a project or kill it outright. Otherwise they felt they'd be wasting resources on a wrong direction or a dead end.
Taking this hard line helped them get to their inflection point that much faster. In 2005, a successful market test eventually led to a product launch with Sprint that opened the door to hordes of paid subscribers. From there, the company was able to land similar deals with AT&T and others, basically guaranteeing a lucrative business going forward. Only then did they start hiring a lot more people.
The Difference Slow Burn Can Make
“Most companies working in our field didn't make it because they ran out of money before the wireless carriers were ready to launch their services,” saysRoumeliotis.
If you're in a B2B market where customers are slow to make decisions, this is something you have to take very seriously. You have to last long enough for them to get all the way through the sales cycle. It's not an easy feat.“You have to know how fast your customers are capable of moving. For us, decisions were made over the course of six months, or even 2 years.”
Having a slow burn rate allowed us to wait out our market. And when it was ready for us, we pounced.
In addition to capturing market share, Location Labs' conservative tack also made it easier to raise follow-on funding.“To this day, if you asked our investors, they would say our defining characteristic was our capital efficiency, and that allowed us to find really valuable opportunities,” he says.“I recently ran into a VC I had pitched in 2002, and he was like, 'Hey! You made it? How did you make it?!'”Roumeliotis explained that they had made their money last during the five leanest years in the tech industry without raising.
“Because we were so capital efficient we were able to focus all of our energy on finding a profitable business model,” he says.“Once you're profitable, you have options. You can explore more ideas. A lot of investors will be knocking on your door instead of the other way around. The ones who told you to spend more to grow more never bring it up again. It's an amazingly liberating thing for your business.”