Feel the Boot

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75. Surviving a Short Runway. Startup burn rate < 6 months cash

Sometimes you will find yourself running out of runway for your startup. Even if the company is doing well, you might have difficulty raising your next funding round before your cash runs out.

What should you do when you only have a few months of capital left?

I like to think of cash in the bank like altitude in a plane. If you are not cash flow positive, the plane is always descending. Each investment round boosts the plane higher.

Your job is to prevent what pilots call "controlled flight into terrain" and what the rest of us call "crashing."

When you find yourself running out of altitude or nearing the end of your runway (pick your favorite metaphor), you need to take immediate action if your company is to survive. The steps you should take depend on the probability of closing your next round in the relatively near future.

An experienced investor once told me the first rule for founders is "don't run out of money." The second rule is also "don't run out of money." And so are the third, fourth, and fifth rules. He said this to emphasize the importance of maintaining a cushion of cash to stay solvent but also to ensure that you can negotiate with investors from a position of strength. Without money, you end up having to take whatever they offer you.

When you realize cash is running out, you need to act quickly to change your trajectory. Time is not on your side. If you half your burn rate with six months of runway, you now have a year. If you wait until you have one month left, that only buys you 60 days to hit your critical milestones, close an investment round, or reach positive cash flow. That's probably not enough time to pull up and avoid crashing to earth.

If you find yourself in this situation, ask one question: Are you likely to get funding with a little more time? If so, then focus on extending your runway to hit the key milestones that will allow you to close your round. If not, you need to take more drastic action to lighten the plane and stop your descent, or the company won't exist in a few months.

This article is part of a series on Running your Business.

If funding is close

If additional funding is imminent, either because you have some of the round closed already or you're about to hit the milestones you need, then you need to extend your runway.

The next steps are obvious. First, you need to reduce your burn rate. Second, you should focus on increasing revenues, but not at the expense of slowing your growth. Slower growth could significantly impact your valuation in this upcoming round and scare off some investors.

This is not the time for subtlety. Cutting your burn rate by 10% won't make much difference. Plan to reduce your burn by 30%-50%. That is not the same as cutting expenses by that amount. You only need to shrink your losses. If you are close to break even, this could be easy. If you have little to no revenue, the challenge is much harder.

When trying to reduce your expenses, consider eliminating subscriptions, delaying purchases, and postponing new hires. Slash any unnecessary costs. If cutting something would not prevent you from delivering value to your customers, it is a candidate for the chopping block.

You might need to consider even more painful options like skipping your salary or asking your employees to do so. Consider deferring pay or using equity in place of cash. If you have offices, look at renegotiating or terminating the lease.

Any expenses you need to continue your growth trajectory must have a short return on investment. My guideline is to avoid any expenditure that will not generate a return in under 30 days. When you have only months to live is not the time for long-term investments.

Unless you have most of your round soft-circled or committed, I would start worrying about your runway when it gets down to six months. Fundraising almost always takes much longer than you expect.

At that point, you can start tightening your belt a notch at a time. If funding does not materialize, you can continue to cut deeper to extend the time before impact.

Try never to allow yourself to get below three months of cash. Maintaining at that level requires constant reductions in your expenses.

Every month, re-evaluate the probability of closing your funding round. Are you still likely to get the infusion within the time you have left? If not, you need to shift your focus to achieving level flight.

My Experience

I went through precisely this process with Anonymizer back in 2000. This was during the dot com collapse, so we expected significant turbulence.

Fortunately, we had a couple of options on the table. We had a term sheet from an angel investor interested in taking the whole round and an offer from a public company to acquire us at a reasonable valuation.

However, as the crisis developed, the angel got cold feet and pulled their offer. During the weeks we negotiated the acquisition, their stock price plummeted from thirty to three, causing them to lose interest in the deal and refocus on keeping their own plane in the air.

There were no prospects for any other funding and no cavalry to come over the horizon to our rescue. Our only option was to drive for break-even before the money ran out.

We laid off some of the team, stopped hiring, cut our free services, raised prices, delayed purchases, and pushed off paying bills from vendors who could not turn off the lights or shut down the business.

It was close and brutal, but we managed to level off with just a few weeks of cash in the bank. Anonymizer continued like that for 18 months. We carefully added back spending as revenues increased, always maintaining break-even cash flow. Eventually, we found our product/market fit, growth accelerated, and fundraising became easy and later unnecessary.

Getting to break-even

Like us, if you have a short runway with no realistic prospect of imminent funding, you need to focus on survival and get to break-even or profitability as quickly as possible.

This is often called transitioning from "default dead" to "default alive." If you are at break-even or better, you have an infinite runway to hit your milestones or recruit investors. You might even change your strategy to bootstrap rather than continue to take outside investment.

I jokingly call this the "cockroach strategy" because people say they will be the only things left after the apocalypse. In a crisis, embrace the cockroach. You can't win if you don't survive.

This is only an option if you have a viable path to profitability. The company needs to be fundamentally sound and generating revenue or have expenses that can be reduced to zero. If you can't get there from your current state, you might want to look at another article, "Quit, Pivot, or Persevere" to help you consider whether you can pivot your way out of this situation or if you should close shop and start fresh.

When you are pursuing the cockroach strategy growing revenues becomes more critical than it was when extending your runway. In addition to the actions mentioned earlier, you should also consider options that could generate cash even at the expense of growth. While that might hurt your valuation, your valuation is zero if you crash.

Consider removing free services, raising prices, adjusting the pricing model, accelerating payments, and longer subscription terms. This will probably cost you some customers but can mean everything to the viability of the business.

You may also need to think about even more drastic cost-saving measures. At this point, you should already have cut all the fat, so your next steps will be painful. The question isn't "can I cut this" but "how can I cut this?" When survival is on the line, everything is on the table. This will cause problems in the short term but allow you to have a long-term.

That probably includes staff reduction. Layoffs suck. Everyone hates firing friends and losing strong team members. Some may be willing to work for non-cash compensation if they can afford to, but many can't or won't. Remember, if the company fails, everyone loses their jobs. Eventually, if things turn around, you may be able to rehire them later.

Whichever situation you are in, the #1 priority is to avoid flying into the ground. Start pulling up early to give yourself the time and opportunity to succeed.

Y-Combinator has its own advice for companies with less than 1 year of runway.

Until next time, Ciao.


Next, you might want to read about some of your other options to survive.

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75. Surviving a Short Runway. Startup burn rate < 6 months cash Lance Cottrell