Tactical advice for VC-backed founders: How to effectively allocate your new funding

Congratulations on closing your latest round!

Now comes the hard part—allocating that capital to build a strong, sustainable business.

I’ve raised over $2B in VC funding as the current CFO of Rippling and former CFO of Brex. I understand that as a founder, you may just want to focus on building the best product possible and not have to stress about your company’s burn rate.

That’s why I’ve created a step-by-step guide to help you effectively manage your new cash–so you don’t have to go through the same ups and downs that I did.

Steps to create sustainable cash burn that builds value

1. Prioritize long-term value over market trends

To start, you need the right approach to managing cash. Investors and markets often push startups to extremes—either “grow at all costs” or “cut to break even.” These approaches aren’t sustainable and can give founders whiplash, because you can’t adjust your business as quickly as  investors and markets can change their opinions (which is often overnight).

Instead, focus on building a business that can thrive in any market cycle by making decisions based on the long-term “through cycle” earnings power of your business. If you optimize for sustainability, emphasize good unit economics, and track key efficiency metrics, you will build a business that consistently becomes more durable and valuable over time.

2. Emphasize unit economics and track efficiency metrics

There are certain metrics that are essential for creating a data-driven foundation that reduces risks and drives growth for your startup. By aligning these metrics with your revenue growth plans, you’ll avoid common pitfalls like inefficient spending or scaling too quickly without sustainable returns.

Here are a few of the most important ones to measure and monitor for VC-backed companies in software and fintech like Rippling:

Unit economics

Unit economics tell you whether each sale moves you closer to profitability and if your growth is sustainable. It’s generally measured using the lifetime-value-of-customer (LTV) to customer-acquisition-cost (CAC) ratio. 

The LTV/CAC ratio compares the cost to acquire a customer with the total revenue (or lifetime value) the customer generates for your business. It can be broadly used by companies of varying industries and business models. In short, this metric indicates whether your customer acquisition costs are justified by the long-term revenue you’ll gain.

LTV to CAC Ratio = Lifetime Value of Customer / Customer Acquisition Cost

For example, if your average LTV is $800 and CAC is $200, your ratio is 4:1 , meaning you earn $4 in profit for every $1 spent to acquire a customer. Ratios above 3:1 generally indicate efficient spending.

If your LTV:CAC ratio is significantly higher than 3:1, it may indicate you are leaving profitable sales on the table and should increase your go-to-market spend. However, companies get in trouble when their LTV/CAC gets too close to 1:1. If you’re paying $1 to acquire $1 of lifetime profit, your business is not creating value and this may be an indicator you are over-indexed on growth or have not found product-market fit yet.

Additional efficiency metrics

LTV/CAC is not the only metric you’ll need. For example, for a SaaS company, the metrics below will help you make better decisions and benchmark your efficiency against similar companies:

• CAC payback period: Quantifies the amount of time it takes to recover the cost of acquiring a customer. This metric tells you how quickly your investment is returned and whether your growth model is efficient. A fantastic CAC payback period is 12 months. A good CAC payback period is 18 months or less.
• Burn multiple: Measures how much cash your company burns relative to its revenue growth. A burn multiple of less than one is excellent, indicating efficient growth, while one to two is good for scaling companies. Anything above two suggests unsustainable spending.
• Net dollar retention (NDR): Tracks how much revenue is retained from existing customers, including upsells, cross-sells, downgrades, and churn. A good benchmark is 100% or higher, with top-performing SaaS companies achieving 120%+.
• Churn: Identifies the percentage of customers who leave during a specific time period. For SaaS companies, a churn rate of less than 5% annually is excellent for enterprise-focused companies, while SMB-focused businesses should aim for under 10% annually. This concept is often quoted as “retention rate,” which is the inverse of churn: target 95%+ for enterprise and 90%+ for SMB.

NDR and churn are important concepts because keeping existing customers, or cross selling them, is cheaper and more margin-friendly compared to acquiring net new customers. Lower churn also reduces the “leaky bucket problem”. If you’re a $10M business, a churn rate of 20% means you have to acquire $2M of new business to achieve a 0% growth rate. And at $100M, this number becomes $20M! The lower your churn is, the smaller the hole you must fill each year by acquiring net new customers.

3. Remember, not all cash burn is created equal

When planning, remind yourself that efficient cash burn is about ensuring each dollar drives valuable growth, not just increasing your top line revenue at any cost.

For sales and marketing, focus on metrics like CAC payback to avoid overspending on customer acquisition. Hold off on significant sales investments until you reach a stable CAC payback period, signaling solid product-market fit.

For R&D, use industry benchmarks to gauge appropriate R&D spend based on your company stage, such as engineering headcount as a percentage of revenue. One common pitfall is overinvesting in small markets—many companies make large R&D investments upfront without assessing if the total addressable market for that product can sustain it.

At Rippling, we invest heavily in R&D, but it’s aligned with our market’s size and potential. Avoid the trap of over-investing in R&D for a limited opportunity.

4. Plan for the worst, hope for the best

With these metrics in place, build a financial plan to help you avoid risks like overinvesting in growth, poor cash flow dynamics, and premature scaling. Plan at least 24 months in advance, and always have a base case, worst case, and best case scenario—but thoroughly plan for the worst case scenario.

Identify your “burn levers,” the expenses you can cut if needed, so you can stay agile if revenue dips or cash burn spikes. Planning for the worst while hoping for the best will prepare you for market fluctuations and reassure investors that you’re ready for challenges.

The best companies do the following…

Re-forecast regularly and utilize excess revenue wisely

You should revise your financial forecasts at least quarterly—or sooner if there’s a significant deviation from the plan. At Rippling, we re-forecast monthly to stay agile. 

In my experience, costs usually land as expected, but revenue can lag behind. And there’s usually a delay between when costs are incurred and when you see their revenue impact or lack thereof. If one area of your business isn’t working, it may be a sign to pull back on spending or reallocate that money to another part of the business with higher ROI.

Conversely, if revenue is growing ahead of your plan, it might be the wrong decision to allow that excess revenue to fall to the bottom line. Instead, take this as a sign that there are areas where you should double down and reinvest to drive even more growth.

Understand the advantages of your cash flow dynamics

In SaaS businesses, upfront annual subscriptions pull forward revenues to generate higher cash flows than net income for a given period, especially during growth phases. This well-known advantage of SaaS companies produces a favorable flywheel: sell annual plans, collect upfront revenue, reinvest into growth, sell more, collect more upfront cash, repeat.

You should leverage this advantage to drive growth. Consider what incentives you can set to collect more cash upfront and lock in customers for longer periods of time. The more cash you collect upfront, the more you can finance your own growth and avoid dilution from raising money externally from investors.

For inventory-based businesses like ecommerce, upfront inventory costs mean cash burn is often higher than net income. Here, in the early stages, be mindful of metrics like inventory turnover, and do whatever you can to shorten the lag between buying inventory and customer sell-through. This enables you to quickly react to any changes in customer demand. Additionally, you may consider exploring financing structures collateralized by your inventory which can be more affordable than raising equity funding.

Choose a consolidated spend management tool

As a founder, admin work is a costly distraction. You want to be able to focus on big-picture capital allocation questions like the ones I discussed above, and avoid worrying about day-to-day operational finance such as paying bills or ensuring employees don’t waste money.

To streamline spend management, you should use a consolidated platform that takes care of all of your operational finance needs across tech-enabled corporate cards, automated expense management, and modernized bill pay.

• Tech-enabled corporate cards block out-of-policy expenses in real-time
• Automated expense management eliminates manual approval routing, receipt matching, and reimbursements
• Modernized bill pay uses AI to instantly turn invoices into ready-to-pay bills

All-in-one platforms that offer all of these capabilities can help you scale. They allow you to see all your spend in one place, run analytics to identify ways to save money, and handle more complicated functionality like routing expenses to the right approver or supporting spend management needs for employees in other countries.

At Rippling, we use Rippling Spend because it allows us to operate as a lean finance team and maximizes the time we can dedicate to advising the business on important questions around capital allocation, long-range planning, and other strategic projects.

Other companies see benefits like this too. In fact, 44% of startups using Rippling Spend cited time savings as a major benefit in our recent survey. 

Final thoughts

Allocating new funding wisely is a critical step in building a resilient, VC-backed startup. By prioritizing long-term value, focusing on key metrics, and staying agile with regular re-forecasting, you’ll be better equipped to navigate the ups and downs of scaling your business. Follow these steps, and you’ll keep your company on a sustainable growth path that generates significant stakeholder value and can stand the test of time.

This blog is based on information available to Rippling as of December 4, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.