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:
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.
- 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.
- Stop supporting bad customers — In every business, there are customers who absorb an outsized amount of customer support. If supporting a customer is costing you more than they’re worth, call the customer and politely fire them.
- Cut the Team — This is the hardest to do, especially within small teams, but it’s effective. Start with anyone who is under-performing and then move to non-critical staff. Consider this, if your company fails everyone on the team will be laid off regardless.
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.
- 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.
- Cut products that are not profitable — Cut any existing features or products that don’t make money. You can wind them down over 30 days but don’t let their usage continue longer.
- Maintain good customers — With a diminished team, you’ll only have the resources to support existing, profitable customers. Make sure they are all happy. Catering to their needs directly, can also lead to short term cash opportunities via consultancy fees for custom development.
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.
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.
- 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”.
- Generate growth, if you can — If you’ve managed to get profitable or extend runway significantly, use this time to generate growth. In general, investors are less interested in a profitable company with flat growth than one burning cash but growing 20% month over month.
- Contact investors — Don’t be precious about who you talk to. Start with your existing investors but branch out quickly to all potential sources including: angel investors, crowdfunding and debt providers. Your primary goal is to relieve the near term pressure, rather than find the best partner for the business.
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.
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
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Thanks to Kaego Rust for reading drafts of this.