Six tips for extending your runway
The rise of all things “big tech” and the pre-eminence of the digital business model as a paradigm for growing a business have come with a new set of axioms for doing business.
Old sayings like “revenue is for vanity, profit for sanity” always sounded trite, but now sound quaint and old-fashioned. There is an entire school of thinking that building a successful business today requires a willingness to bet big. The model adopted by various major tech brands, from Uber to Airbnb, has been to build a product or platform, and get it to market quickly, without worrying about such old-fashioned concepts as making money. And, for as long as investors are prepared to fund it, (with the aim of a long-term payout when it goes to IPO or a similar event), it works. Even if every customer costs you money, it doesn’t really matter.
Sales metrics – such as the number of retained subscribers – are the ones that matter most and the ones that are often flaunted to attract investors. For businesses built to this model, it is all about raising finance to keep your business going.
The rate at which you spend investors’ cash (your burn rate) will determine how long you have until you run out of cash (unless you start to generate profits). This, in the jargon, is your “runway”. And right now, as investors’ belts start to tighten across the world and the global economic growth slows, there are more firms watching the end of that runway come alarmingly close.
A slowdown in investment
According to new research from GlobalData[1], Q3 2022 has been the worst-performing quarter in terms of global M&A deal activity. M&A deal value dropped by 48% compared to the same period last year.
Research from Crunchbase confirms this pattern in the venture funding markets, with the third quarter of 2022 seeing total venture funding drop by 25% compared to Q2 and 39% year-on-year[2]. While 2021 is seen as an exceptional year (thanks to unleashing of funds built up during Covid), it nevertheless points to nervousness from investors.
Closer analysis of the Crunchbase data offers comfort for those at the first stages of growth, as angel-seed funding appears more resilient. While it, too, saw a drop it was not as pronounced as for later stages. But the overall story from the market appears to be one where getting funding is getting tougher.
A classic one-two punch
This presents a challenge for businesses that rely on investment to fund growth. In the digital economy, businesses often require large sums at the development stage, well before they can generate significant revenue. As investor Marty Reed, co-founder of climate tech fund Evok Innovations explains, this is a double blow. “Firms that are pre-revenue are facing higher costs due to soaring inflation, but they don’t have the ability to pass these on in higher prices. On top of that, they’re now finding it harder to raise capital. It’s a classic one-two punch.”
So, how can founders react to these blows? How can they extend their runway, the amount of time left before the business runs out of cash. It’s an important question, because it is usually a lack of cash that kills a business.
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Keep your spending down
It's self-evident and easier said than done at a time of double-digit inflation, but slowing the rate at which cash goes out of the business (your burn rate) is the simplest way to extend your runway. You will need to think hard about any expense you can survive without. Office space is a good example. While you may be stuck in an expensive long-term lease, there may be ways to reduce or mitigate the cost. Talk to your landlord. And while you don’t want to panic staff or create a terrible environment (the good ones will sense any fear and head for the door), you may need to scale back the drinks on the company credit card or company-wide socials. Put a clear policy in place and explain to all staff the reason for the belt-tightening. Your best people will be with you for the excitement of the startup journey, and they may see this as an inevitable part of the experience. -
Be ruthless on head count
This is another piece of advice that’s easier to say than do. There is no easy way for a small firm to lose staff (unless people are under performing, in which case it does everyone good). It is bound to have an impact across the firm. But you will need to look at ways to reduce the wage bill. It is the largest single cost for most businesses and the most obvious place to start looking for savings. Get a thorough analysis of how it breaks down. And think whether there are ways to get the same results without the same level of staffing. It’s rare for the practicalities to allow it, but as extreme measures, do you need to look at outsourcing or off-shoring? -
Look for partners
You may have wanted to launch this new business or product alone, but now the situation has changed, is it time to start to look for other businesses to partner with? There may be another, related business able to help speed up development (in exchange for equity, or a royalty on future sales). The more help you can get that doesn’t have immediate cost implications, the better. Right now you are looking to buy time above all else. -
Consider other sources of funding
If the private equity and venture funding market is in retreat, there may still be funds available elsewhere to keep you afloat until the revenue starts to flow, or another round of investment becomes possible. Sadly, as interest rates rise these are only going to come at a higher cost. But they may be enough to bridge the gap. -
Get that MVP ready
The concept of launching with a “minimum viable product” (MVP) and then continuing development once you start to get feedback and data from users and customers is not new. But it has spread away from the tech sector, where it started (Apple has a long history of using early adopter customers as beta testers) to become the go-to model for launching products. And it makes lots of sense, especially if you want to keep cash burn down. Getting some revenue into the business is not only helpful from a cash flow perspective, it also gives you and potential investors the confidence to know there is a demand for what you’re doing. In a world where investors are harder to convince, having a live MVP can make all the difference. -
Consider other options for revenue generation
Your ambition may be to revolutionise an industry with a brilliant new product. But before you get there, are there other ways you can monetise you and your team’s expertise? While it’s true there is a danger you get sidetracked and end up delaying launch indefinitely, needs must sometimes. Are there consultancy or other “side hustles” that can bring cash into the business and help delay – or ideally postpone indefinitely – the moment the coffers are empty and you run out of runway?
[2] https://news.crunchbase.com/venture/global-vc-funding-pullback-q3-2022-monthly-recap/
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