You’ve launched your startup, you have a solid leadership team, you have some incoming revenue, and the future looks promising. It feels like the right time to raise some cash.
There’s a problem, though.
Funding deals and deal values are a fraction of what they had been. When funding dries up, what do you do?
Every founder must play the tricky game of timing, even when startup funding isn’t scarce. You have to carefully manage cash flow and optimize business results, then fundraise when the market is hot to maximize your company’s value.
Here’s Lighter Capital’s step-by-step guide to help your tech startup survive — and even thrive — when a shaky economy causes funding sources to evaporate.
How to Grow a SaaS Startup in a Capital Crunch
Step 1: Manage your cash flow
Bootstrapped or venture-backed, nearly every tech startup must raise capital to grow. If cash is the lifeblood of a startup, then managing cash flow is as important as raising the cash itself.
Cash is crucial to your startup’s survival. Regardless of how much you raise or what source provides it (including venture capital), you could find yourself among the many startups that fail because of poor cash flow management — 82% of businesses, according to Fundera.
Startups should keep at least 18 to 24 months’ worth of cash on hand to cover expenses, but predicting when you’ll run out of money isn’t all that simple. There’s more to it than subtracting your anticipated monthly costs from the cash you have in the bank. You need to look at what might happen over the next 12 to 18 months, how the business could or should react, and how your cash flow fluctuates.
As you model different cash flow scenarios, also try to answer the following questions since it's not a zero-sum game:
Can I meet or exceed my revenue goals with my current cash flow and runway?
How cost-effectively can I grow revenue? Are there tactics I can implement to lower customer acquisition costs (CAC)?
Do I risk losing existing customers if I cut spending too drastically?
How much cash will I need to maintain market momentum?
If my revenue doesn't increase, how much runway will I have?
How long can I maintain survival mode, and how will it affect my ability to raise capital?
If I can’t raise additional capital for another 12 months, what spending changes will I have to make to extend my runway?
How do debt repayments impact my working capital and cash flow?
This process will help you quantify good/better/best scenarios to determine reasonable ranges for your future cash flow and runway. Managing cash on hand and funding operations can be a delicate balancing act, even in favorable economic environments.
Keep in mind, if you’re overly optimistic about the timing or amount of your next funding round, you risk spending too aggressively and that could torpedo your future valuation — it can even sink your startup.
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Step 2: Get strategic about growing revenue
The well-worn “grow at any cost” strategy works fine when funding is easily accessible and investors are eager to bet on potentially big returns. When investors seek to hedge their risk, however, frugality rules.
Revenue growth will always be important in investors’ eyes, but when fewer deals and dollars are flowing into your space, you also have to demonstrate a clear path to profitability.
Here’s what growing the right type of revenue can do for your company:
Control your burn rate, lengthen your runway, and potentially boost your startup’s valuation.
Focus your attention on acquiring more of your ideal customers — those who will value your product and services most.
What is the right type of revenue?
The right revenue sources can have an exponential effect as you build your business. Here’s how to qualify revenue that works harder for you as you grow:
The revenue is recurring, via monthly or annual payments.
You aren’t burning up runway to acquire that revenue. Basically, the ratio of your customer lifetime value (LTV) to customer acquisition cost (CAC) is greater than 1.
You can minimize customer support costs to maintain that revenue and minimize customer churn.
Add-ons and upsells increase your recurring revenue and customer LTV.
The revenue improves your gross margins.
Track metrics to qualify your company’s revenue, which will help you monitor its overall health and sustainability so you can adjust your strategies. You’ll be able to grow under your own steam longer and use your revenue to source additional capital for further growth.
Step 3: Concentrate on customers
It’s just as important to qualify the strength and sustainability of your customer base as it is your revenue if you’re to weather an economic downturn. As your primary revenue source, customers can be both asset and liability. Assess the risk level that your customer accounts pose.
For example, if most of your customers are equity-backed, non-revenue-generating startups, you expose your company to an industry or customer-concentration risk. When their industry slows, all your revenue sources will slow, too, which can harm your valuation and ability to generate future funding rounds. Worse, your startup could unexpectedly run out of cash.
By generating revenue from a wider array of industries, customer types, and customer sizes, you’ll have more diverse revenue sources. This can smooth out revenue dips caused by industry-wide events and help minimize the risk that your revenue will fall off a cliff.
Furthermore, a diverse set of customers is good evidence of your startup’s product-market fit. A strong product-market fit will deliver steadier revenue, meaning better funding terms when you raise capital.
Step 4: Mind your runway
Earlier, we emphasized being able to fund 18 to 24 months of future expenses. Don’t concentrate too heavily on your current cash; instead, operate your business with insight into what your cash balance will look like a year from now.
Taking a forward look at your runway helps you consider the choices you may have to make if funding and market conditions don't improve. It also focuses your efforts on tactics you can implement today to improve margins, costs, and sales.
Important: Don’t let your cash runway fall below 12 months.
Startups with less than 12 months of runway can appear distressed and have difficulty raising capital. Investment deals, when they do arise, are typically less than favorable for startups that have short runways.
Markets invariably go through cycles. Regardless of which cycle you’re in — booming or slowing — your startup will have the best chance for success when it’s growing sustainably. You’ll also have the best chance at getting favorable funding terms when you have cash in the bank, a reasonable burn rate, and a long runway.
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