With the venture ecosystem adjusting to slower economic growth, many startups are looking for ways they can extend their cash runways. This is prudent; fundraising for early-stage startups is more difficult now than at any point in the past several years, and investors are pushing hard for lower, less aspirational valuations in the companies they do fund. In our work as fractional CFOs for venture-backed startups across multiple economic cycles, we’ve seen a number of steps work well for companies looking to stretch their capital through a downturn. Some may seem less impactful than others, but all can help navigate a difficult environment and delay your next financing round until the storm clouds clear. And here’s a secret – most of them are good business habits to develop anyway.
1. Check tech spend for departed/laid off staff
Startups are typically fairly lean when it comes to headcount, but layoffs and headcount reductions are a fact of business-cycle life for early-stage businesses just as much as in larger ones. However, because development & engineering are also usually overweighted in startup rosters, you’d be surprised how many times we see software licenses, AWS instances, and other tech cost remain in place long after the headcount/footprint has shrunk. Administrative controls are often sparse at early-stage companies, and a lot of slippage happens when no one is paying attention to the various subscriptions, logins and SaaS tools that need to be disabled or canceled once an employee leaves. It may sound like small dollars, but it adds up – and instills an important control into your processes going forward.
2. Evaluate marketing/awareness spend
It’s more important than ever to measure the impact of your marketing and advertising and direct your investments efficiently. Keep a close watch on your marketing analytics to see which channels and campaigns are delivering strong ROI so you can continue to invest in those activities. Remember, what works best right now might be different from what worked best 6-12 months ago. Pull back from activities that aren’t showing a return, and even consider using some of that capital on product features that accelerate your launch or give you a competitive advantage once the dust settles.
3. Stretch hiring
Sounds like a no-brainer, right? Delay or avoid expanding payroll, bringing on high-priced developers or that COO you know who would help keep the trains running. But there is a tendency among fast-paced startups to stick to the hiring goals they established back when things were rosier. It’s a cognitive bias that occurs when we anchor the future on our pre-existing plans, strategies or ideas, and refuse to adjust them to new information. Payroll is almost always the largest expense of a startup, and in a perfect world, we’d hire with abandon. But when you’re seriously interested in stretching your cash and extending that runway, few things will have a greater impact. Look at your hiring goals with clear eyes, and find ways to push off headcount commitments until the weather clears. Hint: fractional resources, like Burkland CFOs, are terrific ways to get and keep operational functions squared away without the expense of an FTE.
4. Don’t become a bank
When economic cycles turn down, virtually every business starts to worry about being paid on time. However, many don’t actually change the base terms under which they invoice customers, or proactively tighten up their accounts receivable function. Customers invariably will start to stretch paying their bills if they can; they’re looking to stretch cash just like you are. However, this can mean you’re now financing your customer’s business – a bill that goes unpaid for six months is essentially an interest-free loan. One of our mantras as CFOs is “never be a bank” – bring your A/R in as close as you can by shortening your invoicing cycle and actively reaching out/working with the clients that owe you money.
5. Pull revenue forward
Moving customers who pay you monthly or quarterly to annual terms is a great way to accelerate revenue. Even if you provide a discount to clients in return for longer contracts, you’re pulling a portion of your downstream renewals forward to the current period and increasing your cash flow now. Particularly for SaaS or recurring revenue businesses, annual contracts can also lower churn rates, require less administrative overhead to manage, and deliver better overall economics than monthly ones. Note that depending on how and when your products or services are delivered, there may be an accounting difference between the cash you receive today and the revenue you recognize on your books today, but in terms of increasing your cash runway, being paid for a year today always beats being paid in 12 monthly increments.
Necessity is the mother of invention, as the saying goes. When looking to stretch your cash, don’t leave many stones unturned. Look critically at your spend and analyze the trade-off between a growth-at-all-costs approach and a more cash-conscious one. Even if things end up better than you feared, being able to find ways to extend your runway is a tremendously valuable discipline for startups to master.