3 Ways to Fix your Startup’s Cash Crunch

When you’re running out of money at your startup, don’t bury your head in the sand. You have to act. Waiting only makes things worse, as time pressure makes tough decisions even harder. If your company is coming to the end of its cash runway, here’s how you solve the problem:

Get Profitable

Profitability solves everything but always feels impossible. If you have revenue with reasonable margins, there’s a very good chance you can get profitable — assuming you’ll make the tough call. Even if you don’t get all the way to profitability, the reduced costs will give you a lot more time.

Action Items:

  1. Raise Prices — If you offer free plans, discounts or services that are underpriced, they all have to be cut. Do it within 30 days and their removal will force customers who need your service to pay up.

At SendHub, while raising our Series B we were tight on capital. To cut costs and extend runway, we turned off our free plans. Some customers were annoyed, posting 1-star app reviews and negative blog comments. However, it also increased our paying customers by almost 30%, giving us enough time to successfully close the round.

Narrow the Product

Stop focusing on new initiatives, as you can only trust your time with products you know work — not products you think might work. Your remaining team should be focused on maintaining existing customers and the revenue they generate.

Action Items:

  1. Stop new feature development — Unless you’re building to fulfil an existing, paid contract, now is not the time to test new ideas. All team members will need to focus on what is already built.

A startup I coach through the Alchemist Accelerator, came back from near-death by focusing on the needs of one marquee customer, at the expense of all others. By building a custom integration for the company’s legacy workflow, they were able to secure a one time development fee and a multi-year contract. Although they lost a few customers, they saved the business.

Start Fundraising

With improving financials and a renewed focus, you can raise a small amount of money. If you’re profitable, you could spend a little to demonstrate growth. Everyone will know you’ve been through a tough time, so present the company as growing since you’ve focused on a new strategy.

Action Items:

  1. Create a new plan — Now that you have a different team, product and cost structure, you’ll need a new plan for the company going forward. Provide monthly milestones leading to an outcome like “in 18 months, we’ll have 25 enterprise customers, with a $1M annualized run rate and be cashflow positive”.

During SendHub’s Series A process, we used crowdfunding as an alternative capital source. Although it required a lot of manual work for each dollar raised, it gave us the momentum to attract a term sheet from a more traditional institution.

Very few startups survive a cash crunch but almost all have to suffer through one. If you believe in your company, get ready to fight for its survival.

This article is part of a series on Startup Management.

3 Ways to Fix Your Startup’s Cash Crunch
Bad Ways to Ask for Investor Help
How to Avoid Startup Failure

Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.

You can reach me here: ash@sterlingroad.com

Thanks to Kaego Rust for reading drafts of this.

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Pre-seed Investor. Email: ash@sterlingroad.com. B2B, US only. I work with founders for 3 months before investing. More info: http://SterlingRoad.com/process

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