Nine-Month War Chest Rule
Hold nine months of burn to buy time for an orderly contraction
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 4
- Confidence
- 94%
The Nine-Month War Chest Rule sets a concrete liquidity target: keep cash equal to nine months of the company's monthly burn rate. The reserve is not intended to let management continue unchanged while revenue disappears. Its purpose is to buy enough reaction time to reduce staff and other costs, recalculate the lower burn, and preserve part of the reserve while the company contracts. Sikorski derives the rule from the 2008 crisis, when his banking-software company's revenue fell sharply and he mortgaged his house while rebuilding. Nine months would not have erased that crisis, but he believes it would have let him scale down without putting his home at risk. The mechanism links a measurable cash threshold to a preplanned contraction response.
Origin
Alexis Sikorski formed the rule after the 2008 banking crisis cut his company's revenue and he mortgaged his house while rebuilding.
Core principles
- 01Another severe downturn is a matter of when, not if
- 02Cash reserves fund reaction time rather than passive survival
- 03Scaling down is a distinct and difficult operating skill
- 04A reserve can protect the founder's personal assets during contraction
How to run it
- 1
Measure monthly burn
Calculate the cash the company consumes each month at its present cost base. Use that figure as the input for the reserve target.
Pro tip Update the calculation whenever the cost base changes materially.
Watch out A reserve target based on stale burn data creates false confidence.
- 2
Build nine months of cash
Accumulate cash equal to nine times the measured monthly burn and keep it available in the company's bank account. Treat it as protection against the next major downturn.
Pro tip Build the reserve before distributing or reinvesting every available penny.
Watch out Growth spending that consumes all profit leaves no room to absorb a sudden revenue shock.
- 3
Activate contraction quickly
When a crisis hits, reduce costs rather than spending nine months operating exactly as before. Make the difficult staffing and operating decisions early enough for the reserve to retain value.
Pro tip Prepare the order of cost reductions before a crisis forces rushed choices.
Watch out The war chest is reaction time, not permission to postpone action.
- 4
Recalculate the runway
As the company shrinks its monthly burn, recalculate how long the remaining reserve will last. Continue adapting the operating base to the changed demand environment.
Pro tip Look for products or services tied to the crisis-related needs customers still fund.
Watch out Assuming the old demand will return without changing the offer can exhaust the reserve.
In the wild
A company burning $100,000 per month builds a $900,000 war chest. When revenue suddenly contracts, management immediately removes nonessential costs and reduces the burn to $60,000 rather than waiting nine months. The remaining cash now supports a longer adjustment period while the company develops offers customers still need during the downturn.
→ The reserve finances a controlled contraction and protects the founder from using personal assets.
Common mistakes
Spending every penny on growth
Reinvesting all profit in staff, offices, and products leaves the company exposed when customers suddenly stop buying.
Treating reserves as idle runway
The reserve should fund fast adaptation and cost reduction, not nine months of unchanged spending.
Assuming scaling down is easy
Contraction requires its own decisions and skills and can be harder than scaling up.
Is it for you?
Best for
It is best for established companies exposed to economic cycles or concentrated customer demand.
Not ideal for
It is not a promise that nine months of cash will preserve an unchanged company through a prolonged crisis.
From the transcript
“the first thing I make with my client is I want 9 months of of your monthly burn rate in your bank account.”
“So in 9 months you can fire a lot of people and reduce your cost considerably and not completely exhaust your war chest.”
“Scaling down is a is is a skill. It's very very hard. It's way harder than scaling up.”
From the episode
From Basement Startup to $100M Exit ft. Alexis Sikorsky
Alexis Sikorsky