The current funding squeeze in the private capital markets has closed many startups. In the recent Pitchbook survey, about 3,200 venture-backed businesses went bust last year. With Venture Capital Firms taking a more cautious stance on parting with their “dry powder,” more and more startups are experiencing a cash crunch, unable to secure additional funding to finance their operation as they pursue product-market fit.
This is particularly tricky when a startup is in the “chasm,” the market purgatory where its product is yet to break into the early majority customer base. More than ever, a startup must be diligent in testing and experimentation while providing consistent operational support to its customers at this stage.
Hiring for critical roles is integral at this stage, and marketing spending is essential. Holding off to preserve cash at this stage could put the startup in the zombie zone, a stagnant state that prevents immediate collapse and hinders meaningful growth.
I call such a stage in a startup’s life death by a thousand paper cuts.
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Though VC firms are using dry powder for bridge financing on their active portfolios, there is no guarantee that your existing investors will write you a check so you can live another day.
However, keeping an open and healthy relationship with your current investors remains essential. Continuously improving the efficiency of your operations while keeping investors abreast of your situation is even better.
So, when your runway cannot support your scale during a funding crunch, these five points can help you avoid death by a thousand paper cuts.
Keep your books clean
When the runway is short, running a tight ship on your cash flow is a must. It is easier to find leaks when you know where to look, and having clean and timely financial records can help. Since setting up a fully functioning finance department is expensive, you can consider outsourcing it to service companies with operational knowledge of your industry. If you still need one, a fractional CFO can provide value in scenario planning, financial modelling, and cash flow management.
Adopt the Kanban method when working on priorities across your organisations
Set a limit of work-in-progress items at any given time to avoid stretching finite resources. In his book The Lean Startup, Eric Ries recommended that no more than three items be at any stage at any given time. Limiting the priorities at any given time will ensure that resources are allocated efficiently on high-priority tasks and train the organizations to separate the “need to be done” versus the “nice to be done”.
Focus your efforts and attention on your identified beachhead market
Running after different customer personas can stretch your cash flow thin and drain your war chest inefficiently. The more targeted your customer is, the more equipped you are to establish coordinated efforts across your departments. Refining product-market fit and generating revenue cost-effectively with limited resources is much easier if you are not chasing multiple buyer personas.
Trim the fat on your overhead
The Friday mixer, where only the same people keep showing up, could be skipped. Avoid multi-year or annual contracts on apps and tools that are not integral to your operations. Also, the savings in going long-term versus monthly payments are moot if you cease to exist in a year. Taking proactive measures toward efficient capital allocation can message your investors of fiscal discipline.
Outsource “certainties” so your core team can focus on managing “risks”
A startup’s challenges as it grows are either certainties or risks. Risky initiatives are often iterative and require a certain degree of commitment and foresight that only your core team can execute. On the other hand, certainties are often procedural and repetitive tasks that are easier to delegate to the right outsourcing partner.
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Understanding which of your day-to-day operations are certainties would allow you to tap reputable service providers with the organizational capacity to monitor and train their people to deliver the agreed KPIs for you. Data extraction, Labeling, bookkeeping, Data Analytics, HR Admin, and Customer Support are some roles your startup can easily outsource.
A short runway during a funding squeeze is no small feat to manage. However, skirting around the issue of a cash crunch could do a startup more harm than good, mainly when follow-on funding rounds are more challenging to close. Putting all your bets on a lifeline from investors without changing how you carry out your operations is risky.
In the best scenario, you only have to deal with dilution and a downround. In the worst case, the lifeline may not arrive, and you have to close the shop. Staying ahead and on top of the crunch can allow you and your team to set priorities on focused, interconnected wins before your startup reaches an irreversible position.
There is, however, a silver lining here. The current fundraising environment in the private capital markets would further separate the winners from the losers more clearly than the bull run we experienced between 2020 and 2022. Startup founders who can navigate this current funding squeeze will have an advantage in driving their business forward once the storm subsides. The ones who don’t could either fail big or die a little every day.
Remember, you do not get bonus points on how close you are to getting product market fit if you run out of money on your way to getting there.
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