Markets are crashing. There is a war on inflation by the central banks around the world. As a result, interest rates are spiking up across countries. The net result for funding-aspirational companies is that funds have dried up.
Founders have some genuine concerns.
- When will we get our next round of money?
- Or worse still, WILL we at all get our next round of money?
- Even if we get it, will we get the high valuations we used to get in the recent past?
- So, do we really want that money if it means we have to dilute bigger?
- What does all this mean for us now?
- How will we finance our cash burn?
- Should we cut spending?
- Should we stop hiring?
- How can we start growing revenues?
- Do we actually have to turn profitable BEFORE we grow revenues and prove scale?
Downturns can be opportunities. Google was founded during a downturn. Not just Google, many other big names like General Electric, General Motors, IBM, Disney, HP, Hyatt, FedEx, Microsoft were all started during recessions. Even Facebook and Salesforce were started right before a recession. There are some more iconic names like Netflix, Airbnb, MTV and Revlon in this list too.
The downturn will be behind us eventually. How do we ensure our company remains viable till the downturn gives way to the inevitable upturn? What should we be doing to stay alive till then?
First, take stock. Find out where you stand. YCombinator has given an excellent framework for their companies. Use that framework. Check if you are going to be default-dead or default alive. Are you default alive or default dead is what they want their founders to ponder.
Very simply put, default dead companies are companies that cannot grow to profitability without the next round of funding. You don’t have a choice but to raise cash but till you find the funds at acceptable valuation, you have to make your available money last.
And, default alive companies are companies that are growing fast enough on revenue even though you may be cash negative today. You have enough money in the bank. You can afford to wait for your favorable valuation but till then, you have to make your available money last.
In both scenarios, it boils down to extending your cash runway.
Here are 10 ways to extend your cash runway.
- Assume you are not going to get any further rounds of money. While this is not an action point in itself, this change in mindset is an essential first step. Because all action begins in the mind first. Your mind-set has to change. This reset is an important prerequisite for the next steps.
- Assume you DON’T WANT to raise money NOW. This is an even more important and additional nuance that your mind-set must undergo. You don’t want to raise money now – simply because you are not going to get good valuations in a scenario of rising interest rates and falling market-caps. Not getting money was a default choice forced on you. NOT WANTING TO RAISE MONEY NOW is a conscious choice you are making. This is an even more powerful exercise to your mind muscles.
If you have taken the above two steps in your mind, you are now ready to take the other steps.
- Scale back or get rid of some revenue lines – Now this may be shocking and counter-intuitive. But understand that it takes money to earn money. In good times, you had money to spread across many initiatives. In bad times, you have to cut down on your money drainers. Some fancy new ideas that you had started to indulge someone’s vanity should not be getting any money allocation from your CFO. There are different ways of doing this. You needn’t only shed a business line – you can sell it too! So, how does one evaluate business lines for keeping, shedding or selling?
- Keep it if that product line defines your business or also if it can sustain itself through cash generation.
- Shed it surely, if it does not define your business and if it is a cash drainer.
- Sell it, if it is large enough and potentially value adding to someone else!
- Itemize and take control of your cash-burn. Your cash burn happens across quite a few headings. See if your cash burn is an investment. Or, a postponable expenditure item. Or, a vanity!
- If it is an investment, ponder these questions. What is that investment worth? What are you getting for it in return? Are you measuring the return versus the spend? How do you measure it?
- If the cash burn item is postponable, well then, just postpone it. It could be a brand-building spend or a training spend or a salary increase. These kinds of spends always fall into two categories. Some of them may be necessary and may be necessary investments to give you more revenue. Some of them may be definitely postponable. Only you know best. Double-check to see if they are really postponable. If yes, postpone them.
- If the cash burn item is a vanity item, then it isn’t easy. Because egos may be involved. It could be an investor or a senior employee or even you! Cut ruthlessly but communicate softly.
- Take a look at your Tech spends. Most of your cash surely went in building Tech often forgetful of the fact that it was just an enabler and not the business itself. When money is going to be tighter, how do you shift focus to look hard at yourself and accept the business you are in? There is only one question to answer – is your tech spend in line with your tech need? So, not a penny more, and not a penny less!
- Take charge of your recruitment. Make sure you are making all the recruitment decisions yourself. Who are you recruiting? What for? How much are you paying every hire? Are you recruiting for your business? Are you recruiting to signal to the investors? Do you need that effective CXO today but who may need a fancy pay packet to be excited? Or would your mid-level trusty manager heading that department today be able to scale up under your guidance or just pull a little while longer? These are hard questions. Only you can answer them. Know that just getting professionals on-board won’t solve the business challenges. With easy cash like before, that was an option, at least. But what do you do now when money is going to be tighter?
- Check if your business is debt-worthy. Because equity is not the only route to raise cash – but only if your business is debt-worthy. What does debt-worthy mean? It simply means your ability (not willingness) to pay back the principal and interest in regular installments at promised dates. Would you confidently be able to ask your uncle to give you a loan from his retirement fund? What questions would your uncle ask? The banks would pretty much ask the same questions.And lastly, experts can help. You are young and this may be your first recession but the world regularly goes through these cycles. Grey hair can help. Seek help. Shamelessly!