What to do if your Runway is under 6 Months

20241124.1 - tactics to extend your runway and survive

For most startups, cash is king, regardless of the amount of money you fundraised. Because of the speed at which you're deploying capital and because of the initial setup costs and the lack of economies of scale, having liquidity in the form of cash reserves that you can deploy becomes crucial up until the point at which you reach some degree of profitability.

What this translates to is a need for you, as the leader of the organization, to have a very close eye and a firm grasp on the finances of the business on a regular basis. More often than not, this translates to monthly reviews; however, I would argue that weekly is more appropriate during this early stage of a business. Gathering data can help to define clearly what positive unit economics look like. You also want to be closely monitoring accounts receivable as well as accounts payable to make sure that, from a cash flow perspective, there is enough liquidity in the business to weather any unforeseen shocks, which at this early stage not only happen frequently but have a huge impact on the business.

Very often, we see founders, once they receive fundraising capital, immediately try to deploy it, primarily on hiring. A lot of the time this involves hiring middle-level to senior-level talent—in some cases, talent from large corporate organizations with high salaries. Often this is seen as an investment, front-loading a lot of the hiring costs up front, with the view that by hiring these middle managers, the development of the product will speed up and the path to profitability will be shortened. In reality, however, there's a challenge with hiring these middle managers and whether they actually deliver results. More often than not, what we've seen is these middle managers incurring large costs for the company with only marginal gains in the performance of the product or the business. This is not to say that these middle managers are not important and not valuable; however, I would suggest that these investments should be made after the business has become profitable and that these middle managers are more effective once a system has been devised. They are assets that can help to optimize the business rather than players that can help to create the system.

Turning to the key purpose of this article, what you really want to be thinking about when your runway is under 6 months is how to control your costs while simultaneously maximizing your revenues. So what this means is, firstly, controlling what is within your power to control, which typically would be on the cost side, and then devising a strategy to maximize the returns from what's out of your control—i.e., sales, marketing, and business development.

So the first step is to, obviously, have our financial model. We should be able to see the unit economics, we should see where all the costs are being spent, and we should also be able to see the relationship between those costs and the revenue they bring in. So the first thing you want to be doing is to be able to create those unit economic dynamics in order to figure out how this Rube Goldberg machine works.

Once you have an idea of how the relationship between the cost and the revenue side is tied, you can start to look at what the surplus costs are. More often than not, for me, this tends to be things like software subscriptions to things like HubSpot, Hootsuite, or other SaaS solutions. The entire industry will have you believe that without these solutions, your business is not a startup. I would argue that, in reality, the opposite is true: software solutions don't substitute for good process and good management.

Once you've eliminated these costs, you can start to look at the headcount. You can start to look at the unit economics and the relative efficiency of each team. You can start to dig into, in detail, the productivity of each team and make educated guesses about who is really contributing and who is, in the most polite way, dead weight. This analysis can also include targets so that we can set goals and milestones to determine what good productivity looks like. We can then use these targets as a way of driving motivation as well as eliminating weaker players, and we can also use this as a way of deciding on probation and exit timelines.

Then what we need to start looking at is the revenue targets and the growth side of the equation. So essentially here, because we have now adjusted the unit economics based on the previous items, we can start to see what more effective growth looks like, based on the reality of the circumstances. We can then adjust our targets accordingly, change the horizon of our burn, and essentially give us a clear idea of what the next few months look like and what the targets for the next few months should be, based on reality.

Next, what we need to look at is accounts receivable. So more often than not, a lot of startups have challenges with chasing cash that's due to them. So we can look at outstanding invoices that we should chaseWe can also look at our sales funnel in relation to the unit economics mentioned earlier. We want to see if there are any methods that we can use to shorten the time horizon of our sales funnel, perhaps by implementing new processes or training.

Then, we need to consider founder and leadership salary, and eventually employee salary. There are ways to delay or dilute these costs. Often, we would start with founders, then leadership, and try to minimize the impact on employees. One method for delaying founder salary is to treat it as debt to the company, to be repaid further down the line. Generally speaking, this is something to avoid, but you may want to plan for it in case it becomes necessary. The last thing you want is to make this a sudden, last-minute decision because you've run out of options. It's much better to have a plan and give yourself some leeway.

From a sales perspective, you might try negotiating discounts or additional incentives to encourage customers to pay upfront. This can improve cash flow in the short term, although it could cause problems in the medium to long term. Ideally, this is a move you want to avoid, but again, if time is short, it's an option.

It's better to approach angels and explore debt financing options earlier rather than later. I would say the six-month mark is a reasonable time to start having those conversations, even if things are fairly stable. It's better to have those options in your back pocket and not use them than to find yourself desperate a month later.

At the six-month mark, your team should be 100% focused on generating new revenue. You should reduce engineering costs and any product development during that window. You may also consider downsizing or putting your engineering team on some kind of break. Of course, there's a risk in losing engineering staff, but there may be ways to offset the negatives. Most importantly, during this window, it's crucial for the business to generate revenue. It's more important than innovating product solutions. What has become very clear to me from the portfolio I've worked with is that it's very rare to be able to build your way out of this type of cash flow problem. The secret to growth is not a better product, but more distribution.

In conclusion, navigating a runway of under 6 months demands a multifaceted approach centered on cost control, revenue maximization, and strategic prioritization. While the measures outlined may necessitate difficult decisions and adjustments, they are crucial for ensuring the startup's survival and future growth. By proactively addressing financial challenges, optimizing resource allocation, and focusing on revenue generation, startups can increase their chances of weathering the storm and emerging stronger in the long run. Remember, the key is to maintain a clear vision, adapt to the evolving circumstances, and remain laser-focused on achieving sustainable profitability.