“If you spend too much or too little, the companies are more likely to fail. There is a balanced burn rate [startups should aim for.]”
A critical factor that determines whether a startup succeeds or fails is its level of spending, or burn rate. These include decisions about how much to spend on product launches, how much initial funding to raise and how to allocate other funds. Some startups aggressively spend to attract quality employees, get economies of scale early and grab market share from the incumbent. But overspending can also signal bad management and a waste of resources that could be used to compete against rivals. However, being thrifty has its downsides, too: The startup might have trouble meeting demand or is not aggressively exploring opportunities for profit.
The key is to reach a balanced rate of spending, according to a research paper titled “Startup Survival and a Balanced ‘Burn Rate’,” co-authored by Wharton marketing professor Ron Berman and Pablo Hernandez, an economics professor at NYU Abu Dhabi. They also found out that the more education entrepreneurs have, the more likely their startups will succeed. However, an entrepreneur’s level of experience generally does not have much impact on a startup’s survival, their research showed. The research was supported by Wharton’s Mack Institute for Innovation Management.
Knowledge@Wharton recently spoke to the authors to talk about their research in more detail. More: http://knlg.net/1TYPfH7