With COVID-19, the war in Ukraine and inflation all causing volatility in the current environment, it has suddenly become much harder for startups to attract investors and raise capital. This means that plans to raise capital in 6, 12 or 18 months may be derailed, thus, figuring out how to make your runway last longer is a top priority.
Runway refers to how long a startup will survive until it runs out of money. Startup runway is calculated by taking the startup’s beginning cash balance and dividing it by the startup’s net burn rate. In a typical environment, a 12–18-month runway will usually be enough time to hit the required milestones expected from investors before startups raise capital again.
However, now that capital has dried up, startups can no longer rely on the fact that more capital is coming their way in the short or medium term, making it essential to find ways to make startup runway go further.
So, how can you extend your startup runway?
Plan, plan, plan
Planning for the best and worst possible outcomes will ensure you aren’t caught off guard when things change. It is essential that startups undertake scenario planning to prepare for a variety of good and bad situations. As a startup, you should ask questions such as, what happens if your revenue remains the same, declines or grows? How would your startup operate with a 10, 30 or even a 50 percent cut to headcount? What is the status of your production costs? Are they likely to rise or fall? Is your customer behaviour likely to change, and if so, how? Through considering many scenarios, your startup can plan ahead and be armed with appropriate strategies should changes occur.
Reduce headcount
If reducing headcount is required to stay afloat, it’s important the process is strategic. Startups should take the time to consider the best possible structure for the business, how to redistribute responsibilities and ways to minimise loss of IP and knowledge. Within this, it is important to understand that there is a balance between ensuring wage costs are as low as they can be, without sacrificing good employees who hold the knowledge, offer the skills and have the talent to ensure the startup continues to run successfully.
Cut costs
With the need to extend your startup runway, cutting your costs will usually be essential. Reduce as many expenses as possible to ensure you’re not overly dipping into cash reserves. To cut costs for your startup, you could consider renegotiating contracts with suppliers or signing a cheaper lease for your office. You could encourage staff to occasionally work from home to reduce internet and energy costs, or even move to a virtual office. You could also consider reducing entertainment costs or gifts for the time being, as each cost counts.
Outsource your CFO
One of the major costs startups incur is hiring a CFO and finance team. Outsourcing this function means an experienced third-party business advisory or CFO services firm will take on the role that a CFO usually would in your startup, for a fraction of the cost. You can leverage their extensive experience to reveal opportunities and overcome financial challenges for your startup, which may be particularly useful for startups needing to extend their runway.
An outsourced CFO will offer strategic financial advice, develop detailed reports and budgets based on the financial performance of your startup, support your business with improving profitability, set policy and help raise capital. An outsourced CFO means increased value through having multiple minds working on your startup at once, sharing expertise and strategic advice, and getting these tasks completed for a lower cost, which in turn, helps your runway last longer.
Source alternative funding
Sourcing alternative funding may also increase your startup runway. Options to do this may include crowdfunding, angel investment, credit cards, taking out a line of credit with the bank or grants. Each option involves different turnaround times, highlighting the importance of preparing in advance.
Increase your prices
A more straightforward way of extending your startup runway is to maximise the revenue coming in by increasing your prices. This may seem daunting, however if your runway is getting smaller fast, it may be necessary for your startup. One way to do this includes only increasing prices for new customers, although this depends on how many new customers your startup gets each month. Alternatively, you may need to also increase prices for existing customers. This may be difficult, but the key is to be honest. To ensure you don’t need to increase your price a second time or do more harm than good, it is essential to strategically model out your price increase first.
Create additional revenue streams
Creating multiple streams of revenue through implementing add-ons or additional services will help ensure you’re protected if revenue from your main product or service slows down. Through having multiple revenue streams, your startup will have more financial security and the startup runway will be likely to last longer.
Need help extending your runway? Keeping Company has worked with hundreds of high-growth startups to manage costs, secure profitability and extend their runway. Contact us today.
At Keeping Company, we’re not just accountants, we’re business people too. With our counsel, your business can reach its full potential.
We have a team of experts; Cloud Accountants, Business Advisors, Finance Specialists working together and ready to help, contact us today.
For all media enquires please contact Tracy Miller, CMO, Keeping Company 0414 898 452.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.