How to not Run Out of Funding
According to a CB Insights study analyzing 101 post-mortems written by founders, the second most common reason that startups fail is because they ran out of money (the top reason was “no market need”)!
Clearly, getting cash flow right is a challenge for startups.
Here are the top tips from our recent workshop about extending your runway:
Runway = Power
For entrepreneurs, one of the most important factors that determine whether you can run your company the way you want to is how much time you have until you run out of money.
When you’re running out of money, the first term sheet offered will look like the best thing since sliced bread, and investors know this. You simply don’t have as much negotiating power when you desperately need an injection of cash.
Know Your Zero Cash Date
You need to know when you will run out of money in order to give yourself the runway needed to make the best decisions for your company. Surprisingly, most entrepreneurs do not have a Zero Cash Date.
Step one: grab your bookkeeper and go through your financials. Some questions to ask are:
- What do we spend each month? What are large expenses or projects coming up?
- How much revenue do we bring in each month?
- At our current burn-rate, how many more months can we afford to stay in business without raising additional funding?
18-24 Months is the New 9-12 Months
It used to be common knowledge that it takes nine to twelve months to raise funding. As in, if you wake up one day and realize you only have six months of runway left, you’re already done for.
With new environmental factors now coming into play — increased interest rates and an uncertain presidential election — you need to push out that timeline. This means you’re going to want to raise a larger round so that you have nine to 12 months to hit your next milestone and demonstrate trends, plus an additional nine to twelve months of reserves. This will allow you to continue making progress and negotiate from a position of strength.
Run Small Experiments to Prove Traction
An extended runway affords you more time to meet with different VCs and get the best offer for your company, but it also creates more opportunities to run the many small experiments that will show momentum.
Investors love data. Often times, entrepreneurs don’t have the time or money to run large-scale experiments, but you don’t have to spend a lot of money to prove that you’re gaining traction. Running a lot of small tests to measure different aspects of your business can be even more effective than running a few large experiments.
Building on Your Strengths Isn’t Enough
Another important detail that many entrepreneurs fail to realize is that VCs will give you money based on a calculation that compares your company’s risk of failure with its potential for success. If you take the latest round of funding and only build on your strengths without addressing weaknesses, you’ve made progress, but it won’t help convince investors that you are now more likely to succeed. Here are the questions you should be asking yourself:
- Are you crossing off the right risks in order to convince an investor to give you more money
- Once you’ve identified the risks you need to address, how do you figure out whether you’ve hit one of these milestones? Which metrics will investors look at? Sign-ups? Conversions? The number of new hires?
- How much money will it take to reach each of these milestones? What is their relative ROI? Will one important weakness be neutralized by a relatively small sum?
The short of it is: start fundraising early and raise a large round so that you don’t end up desperate for funds, run a lot of small experiments that demonstrate traction and product-market-fit, and make sure you diminish your risks for failure before you go back for more capital.
Want more resources for startups?
Check out our Guide to Getting Media Coverage for Your Startup.
