Here's The Number One Mistake That Kills Startups, According To Ben Horowitz

Horowitz says technical founders often do this, and it's a mistake he's made before. Many people think the budgeting process should work like this (from Horowitz's blog):

1. Set goals that will enable us to grow
2. Break the goals down so that there is clear ownership and accountability for each goal by a specific team
3. Refine goals into measurable targets
4. Figure out how many new people are required to hit the targets
5. Estimate the cost of the effort
6. Benchmark against the industry
7. Make global optimizations
8. Execute

But actually, that strategy "gamifies" the budgeting process; Horowitz says implementing it will "bloat companies to the brink of bankruptcy and create a culture of chaos."

Instead, Horowitz says startups should begin by implementing a number of constraints and make the budgeting process look like this:

1. Take the constrained number that you created and reduce it by 10-25% to give yourself room for expansion, if necessary.
2. Divide the budget created above in the ratios that you believe are appropriate across the team.
3. Communicate the budgets to the team.
4. Run your goal-setting exercise and encourage your managers to demonstrate their skill by achieving great things within their budgets.
5. If you believe that more can legitimately be achieved in a group with more money, then allocate that manager extra budget out of the slush fund you created with the 10-25%.

Here's Horowitz's full explanation on why the second set of rules is much safer than the first.