The life of a startup is dynamic and challenging. Uncertainty reigns in the initial years of operation as companies navigate the process of building a competitive team, developing a strong product that aligns to current market needs, launching it at the correct time and scaling as time progress. However, mastering this process does not necessarily equal success, and, unfortunately, a lot of potentially great businesses fail in their initial years or later in the game for one simple reason: they run out of cash.
From day 1, founders are faced with the task of not only raising capital, but effectively deploying it into the business in order to achieve growth and profitability. Although many founders are inherent sales people, skilled in the task of raising VC money, market conditions sometimes complicate this endeavor. During times of instability, cash is king, and leadership teams within startups need to be equipped with appropriate liquidity strategies in order to extend runway and sustain a real business.
Below, a list of 10 steps that may help founders quickly extend their runway, re-adjust their budget or simply maximize their bottom line and liquidity:
- Runway Scenario Planning
Developing a framework to plan for different liquidity scenarios is a great starting point when it comes to runway extension. Founders should evaluate their overall position regarding cash burn and strategize accordingly, considering different macro scenarios that may be out of their control. Sequoia’s Matrix for COVID-19 is a good representation of how the model should look like.
2. Measure Operational Efficiency (Net Working Capital)
Founders can deploy different strategies to deal with limited cash, improve their financial performance and secure funds for their most pressing necessities in the short term. Net working capital is the key metric startups should look at to measure the liquidity and operational efficiency of their operations. The following table shows some policies that startups might implement to maximize their NWC.
3. Re-evaluate Capital Expenditure and adjust accordingly
Although capital investments for expansion are vital for the growth and scalability of any company, when budget is tight, a more conservative approach is encouraged. Future plans to acquire machinery, real estate or any other fixed asset (ie. laptops, furniture, etc.) should be put on hold if they are not a pressing necessity. Startups should focus on growing with limited resources and maximizing the available capacity.
An effective use of CapEx, such as maintenance, could be fixing machinery problems, upgrading equipment, or adapting it for a different use that could increase operational efficiency within the company. Software companies should avoid up-front investments for their servers and shift to a pay-as-you-go model, in order to free up budget dollars to improve the bottom line.
4. Re-evaluate Operational Expenditure and adjust accordingly
As the company starts its operations most of its proceeds should go to OpEx, meaning that the startup will only pay for what is necessary at that point in time.
Some of the actions that can help minimize operational expenditures are:
- Evaluate the possibility of using a coworking space instead of leasing an entire office. Additionally, allowing non-physically essential employees to occasionally or permanently work from home can help free up some budget space.
- Leasing of equipment and machinery is recommended on the initial years.
- IT services can be financed through a pay-as-you-go model in order to avoid having unutilized systems or teams in the office.
- Minimize payroll spending by outsourcing IT personnel, as well as accounting, legal and marketing services.
Note: The following graph shows in a more explicit way the behavior of the startups toward their budget expending in every stage of their life.
5. Cut or restructure secondary business lines
In times of survival it is recommendable to put on hold any expansion plans of the company or exploration of new business models, specially if they aren’t profitable or lack market validation. Efforts should be entirely focused on reaching a Minimum Viable Product and a Product Market Fit if these have not been achieved. Aiming for getting traction and growth in the core business and strengthening client pipeline should be a priority.
6. Evaluate Factoring Solutions
Access to factoring financing to ease the burden of collection and payable activities. These institutions usually won’t charge up-front quotes and will provide liquidity for the receivables or the employee payroll (reverse factoring) in exchange for a financing fee. Factoring usually is a recurrent way to finance the business operations.
7. Leverage from knowledge
Most of the startups unintendedly gather a good amount of relevant information that may be useful for other agents in the industry. Selling knowledge (ie. data, information), can be an additional source of income during financially distressed times.
Additionally, startups that are struggling to increase cash flows can consider giving consultancy services to industry peers or other companies to generate extra cash that may help relieve the lack of liquidity.
8. Become data driven and optimize management and operational costs
Implement a data driven approach within your company. Streamline processes of lead generation, customer management and employee productivity metrics and convert the data into actionable insights to assess performance.
Use data to evaluate sales channel efficiency, gauge and optimize existing processes, and re-evaluate the efficacy of the go-to-market strategy.
The objective is to identify inefficiencies at operational levels and deploy capital to those activities in a more effective way, ensuring that the company is performing at maximum levels.
9. Seek support on industry players and stakeholders
Take advantage of all your resources. There are a vast number of social, governmental and corporate support initiatives to help companies navigate through these uncertain times. Through financial aid or administrative resources and mentoring, there are a number of players focused on guiding startups on implementing appropriate strategies within their companies. Remember, you are not alone.
10. Raise capital or bootstrap
Startups can consider raising additional capital to relief liquidity pressures and navigate the following round more steadily. Startups may look to existing investors rather than new ones when it comes to bridge rounds, as they are usually more willing to make follow-on investments under previous terms.
If the startup is in an early stage, you can consider to bootstrap, meaning investing your personal savings, taking on a mortgagee, etc. and financing the operations of your business.
Bonus: Re-evaluate and update consistently
All previous actions should be constantly measured and re-evaluated during periods of uncertainty in order to ensure effectiveness. Re-adjustment of budgeting and spending strategies should be made accordingly. The final objective is to strengthen liquidity and have a profitable ongoing business in the long run.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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