The concept of having a runway has its own set of maxims for startup founders. Investors we’ve interviewed generally agree that a successful fundraise should leave a startup with 18 to 36 months of capital, and by the time a startup has around 9 to 12 months of cash, it should start raising its next round.
But what should startup founders do when they see the end of their runway fast approaching, investors disappearing into the woodwork, and ever fewer ways to get more capital?
Historically, the most cited and repeated piece of advice has involved cutting costs, first and foremost.
But norms are for normal times. The economy hasn’t been this volatile for years together, and founders today have to almost run the table: strategically cut costs where it’ll hurt the least, manage headcounts to keep growing, keep a close pulse on how growth is shaping up and tune burn rates accordingly, and more.
Still, adages persist for a reason, and several investors agreed that cutting costs is still the best way to get more mileage out of your startup’s bank balance if a fundraise isn’t on the horizon.
Unfortunately, a lot of startups will be dead. That’s just the nature of the fundraising environment right now. Qiao Wang, core contributor, Alliance DAO
“The minute a startup foresees some material slowdown in revenue or client decline, they should cut back costs, no matter what,” said Christian Narvaez, founder of Rayo Capital. “That would be the first step, and would help to extend your runway and give you time to fundraise. Secondly, if you’re running out of capital, think about what is happening.”
Kelly Brewster, CEO of bitcoin-focused accelerator Wolf, stressed the importance of acknowledging your circumstances, especially if they are dire. “There’s only a few levers you can pull. If you are down to just two to three months, you’re out of options. You should pay employees severance, [your remaining] tax bill, and shut down the company. Or, you may find yourself in a bad situation.”
Regardless of the outcome, if you have less than 9 months of runway, “you have to cut burn rate and let good people go, unfortunately,” said Qiao Wang, a core contributor at Alliance DAO.
The vast majority of startups’ expenses are human resources, or salaries, and reducing them is the best way to cut expenses and extend your runway, Wang told me. “Most startups just don’t need that many people. Most founders love hiring people before they have product-market fit. If they let a few people go, it wouldn’t reduce their likelihood of success,” he said.
Wang’s words ring true. These past few years are testament to the fact that companies often overhire, especially when hype, FOMO and optimism drive decisions instead of a measured consideration of what the business actually needs.
The best way to consider what’s necessary to spend comes from not scaling prematurely, according to a portfolio manager who handles more than 300 web3 portfolios. “If the product isn’t fitting [its market], don’t scale your business development team just yet. And the reverse is true: If you overscale early on, it’s better to reconsider. Do you really need a 30-person team or can you deal with less? The balance is around talent,” they said, requesting anonymity.
Source: techcrunch.com