Startup Words Wednesday: Bridge Loan, Runway, Growth Hacker…

startup

“How much runway do we have left before we need a bridge loan? Our burn rate is out of control. Maybe it’s the lack of conversions from the pricey growth hacking techniques.”

If you operate or work for a startup and this seemed like a bunch of balderdash, you’re in for a rude awakening. Startup Words Wednesday will be a semi-regular series on MorganLinton.com that will explain the meaning behind these buzzwords and commonly used phrases using respected sources. Stay ahead of the curve, and learn the most pertinent terminology necessary to navigate the quickly evolving start-up world.

Burn Rate

“Your burn rate is the speed at which your cash balance is going down.”
– AVC.com

In other words, your burn rate is the gross amount of money you’re spending in a month, quarter, or year. For example, if you add up all your expenses on one month’s income statement and balance sheet and you determine the grand total is $50,000 then your monthly burn rate is $50,000, quarterly is $150,000, and annually is $600,000. Traditionally, however, it’s not recommended that you forecast an entire year’s burn rate by extrapolating a single month’s expenses, because businesses accumulate one time expenses throughout the year.

Runway

“The amount of time until your startup goes out of business, assuming your current income and expenses stay constant. Typically calculated by dividing the current cash position by the current monthly burn rate.”
– StartupDefinition.com

Let’s say you had an angel investment of $1,000,000 and you’re not cash flow positive yet. Using the previous example’s monthly burn rate of $50,000, our equation for the current runway is 1,000,000/50,000 which equals 20 months of runway. This is the amount of time until you require another capital injection or successfully monetize your business into something profitable.

Bridge Loan

A bridge loan is a type of capital injection.

“a short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. A bridge loan could be used to secure working capital until the round of funding goes through.

Also known as “interim financing”, “gap financing” or a “swing loan”.”
– Investopedia

This financing option might be used for one of two reasons: as an unplanned last resort to help a startup through growing pains, or as a way to help a company through the transition of an acquisition. The first scenario is extremely high risk for the lender and a VC often commits to giving one when they don’t want to admit defeat and they end up throwing good money after bad to keep the business alive. The second scenario is when the company is about to be acquired by another entity, but that acquisition will take time. It can be a more prudent and cheaper option to take a bridge loan rather than diluting equity with another round of investment. Investors that see the first scenario will be scared off from investing, but will usually be understanding in the second scenario.

Growth Hacker

“What makes this type of growth unique (say, from its corporate counterpart) is the scale at which it must occur: successful startups grow from 0 to millions (or hundreds of millions) of users in a few years.

“Hacker” is more of a double entendre. By one definition, it means programmer – someone who builds features that encourage a company’s product to experience viral growth. However, I believe it also means “hacker” in the more figurative sense (similar to the term “life hacker”).  A “hacker” is someone who thinks outside the box, disregards the rules, and discovers new ways to solve problems. In this way, a growth hacker needs to be as creative as she is analytical.”
– TheNextWeb

Growth Hackers drastically expand their user base in a condensed time frame by both creative and analytics means. The Next Web has outlined their primary tactics to do so:

  • Viral and Paid Acquisition
  • Content Marketing
  • SEO
  • Email Marketing
  • Entire Gamut of Analytics and A/B tests

Conversions

“‘The point at which a recipient of a marketing message performs a desired action.’ In other words, conversion is simply getting someone to respond to your call-to-action.”
– MarketingSherpa

Conversions are the end goal of any sales funnel or growth hacking efforts. For online businesses, success can often be boiled down to this sole metric.

Please leave a comment if you would like to see any other terms on Startup Words Wednesday!

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