Survive and Thrive in Down Times: Cash, Spending and Runway
When things change in the venture industry, they tend move quickly. Taken as a whole, the venture community can often seem like a pack of wild dogs — charging headstrong in one direction until suddenly the alpha male flips, causing the entire pack to flop around and tear off in a new direction.
We’re in the middle of one of those flip-flops. The easy money is gone — we’re in a cyclical downturn and it’s having a chilling effect on venture capital. Suddenly it’s almost impossible to raise money.
I went through this as CEO of Revision3 in the fall of 2008. When Lehman Brothers collapsed it ignited a chilling wave of retrenchment, a winter of venture funding that lasted for nearly two years. Leading venture firm Sequoia Partners played the role of alpha dog that time around, calling their CEOs into an emergency meeting entitled “RIP GOOD TIMES”.
The timing sucked, as we were about to raise our next funding round. August’s cakewalk ran right up into October’s insurmountable cliff. And we weren’t alone. Many promising startups died over the next two years, unable to refill their coffers with cash.
Thousands of startups today are peering up at that same obsidian wall we ran into seven years ago. But it’s not all doom and gloom. You can survive and go onto a great outcome — we did at Revision3. I know this topic has been beaten to death — mostly by the same folks that gave you money in the first place — but I figured I’d weigh in as a CEO who’s been there, made the hard decisions, and ended up coming out in a good place on the other side. So from my hard-won experience, here are the things you should do NOW to make sure you survive and thrive until the cycle heads back up again.
For the next few years cash will be king.
Your business has just changed from growth to survival mode. Getting to 2018 with the cash you have on hand TODAY is your only goal.
That means hoarding what you have and getting more in the door as quickly as possible. Even if you can raise, it’ll be on terrible terms. So that means focusing on customers not investors.
One of my board members told me in 2007 not to worry about revenue “right now,” and to focus on growth instead. I ignored him, and opted to build a small but strong sales team along with product and content. Good thing, because by doubling down on sales we increased revenue from under one to four million during our own 30 months of austerity.
So the first thing you should do is focus on what’s making money today — or what has the potential to make money in three months — and start concentrating on that to the exclusion of virtually everything else.
You need to take a hard look at spending.
Analyze your plans for 2016 and 2017. Are you COGS going up faster than your revenue? Then you’re burning too much to survive and that’s a problem that you really need to fix.
But the real nitroglycerin is likely in that salary line. How many employees do you have today? How many are you planning on bringing on over the next two years? Throw those projections out. You shouldn’t be hiring, you should be firing. A successful layoff is tough — but possible.
You and your executive team should consider taking a pay cut as well. I didn’t take a pay cut during our downturn, and I should have. Even 10% can go a long way to helping everyone realize “we’re all in this together”.
Now take a look at everything else you’re spending money on. New offices? No need. Catered lunches every day? Cut them out. Eliminate all travel and entertainment — except to produce revenue.
We concentrated on what was driving real revenue, and cut everything that wasn’t likely to make money within the next 12 months. We reduced our burn rate by half simply by focusing on business fundamentals, and we killed off the dreams.
(You can make the argument that we should have been doing that all along. But if you buy the conceit that startups are funded to FIND their product/market fit, their business model and their super-power, then experimentation is OK — at least when times are good.)
You’ll probably need at least 24 months at bare minimum.
Once you’ve got some conservative revenue numbers, and you’ve cut all that expense out of your budget, it’s time to take stock.
Realistically, how long do you have? Chances are it’ll be at least 18 months until things turn around, and it will take an additional 6 months to fund raise after that. But you’re better getting to cash-flow positive BEFORE your cash runs out — preferably with 6 months or more of cushion.
If you can’t survive at least 24 months, you need to face a few cold hard facts. Close whatever funding you can get immediately, at whatever terms are available. It’ll be tough — I’ve already seen more than one term sheet pulled in the last month, and I expect a lot more to disappear before this is all over.
If you don’t have enough cash to survive and you can’t get any more in the next few weeks, then it’s time to sharpen the pencils again. Cut deeper. Core down further. And perhaps you should start looking for a buyer at the same time. You’re not likely to get a good price, but you just might keep the dream alive.
Once you’ve figured out a path to survival — and hopefully to profitability — it’s time to focus hard on those one or two objectives needed to keep the company alive. Align everyone toward the same objectives. Keep a tight rein on cash, don’t let your expenses creep up, and pray the cycle is short.
Got anything to add? What are your tips for surviving a time of diminished fund-raising options. Put them in the comments below and lets talk about it.