Racing against time: How to survive the cash vs. product crush
Climate tech startups face a lot of challenges, but there’s one challenge that we believe stands above everything else.
If you can solve this challenge, you’re likely to make a unicorn.
The Cash vs. Product crush is a race against time that can make or break any startup company, not just in climate tech. So in this article, let’s talk about what it is, why it happens, and what you can do to avoid it (or get out of it).
The Fairytale of Founding is Rarely a Reality
In a perfect world, startups would succeed or fail based on the quality of their ideas, and social media, especially LinkedIn, loves to sell this fantasy. You see the same story beats play out all the time. A plucky young startup comes out of stealth with disruptive ideas that could change everything, successfully raises money, develops and launches products, and manages to fundraise again well before cash runs out.
Well, unfortunately, such stories are mostly in fairytales. The reality isn’t quite so rosy.
More often than not, delays and disruptions lead to products failing to come out on time, and in the early stages of your startup journey, that can be deadly. From the beginning, startups are in a race to launch their product and de-risk their ventures before they can start the next round of funding. Investors, unlike the startups, have time and therefore they will always opt for waiting and seeing actual results rather than jumping into the unknown. This means that it is not even enough for you to launch your product, you also need to collect enough data, clock operating hours and show that it really works as expected. All this means that the slightest setback can put you behind so that you run out of cash before you’ve reached a significant milestone.
And the moment you run out of cash with no ability to get more funding, it’s game over.
This is especially challenging for hardware companies, who are often more reliant on physical reality than software, and thus are more likely to fall victim to things beyond their control, like suppliers shipping items late or in poor quality, or say…certain ships being stuck in the Suez Canal.
This struggle is why we see so many startups with disruptive technologies simply fail to cross the finish line.
What To Do When You’re Running Out of Time
Of course, you’re not going to set out expecting to run into disaster. You probably have a lot of plans to make sure that this scenario doesn’t happen to you, and you probably have backup plans in place in case things go wrong. But no matter how good your plans are, something unexpected could still happen. What do you do when you’ve tried everything, and your product launch is still set to be delayed?
We’ve it happen all the time. Here are a few ways to prepare ahead of time or react in real time:
1. Cut cost
It’s easy to look at the cash you have and think about how long it could last, but when you’re making your plans, try to think of milestones instead of timelines. Don’t think that you only have 18 months of cash left, for example — think about what your next reasonable milestone is, and how you can cut costs to reach it. Remember, your goal is to reach milestones, not to survive for set amounts of time. It doesn’t matter how long you can hang on — if you never make any progress, you’re never going to get out of this bind. By focusing on tangible deliverables instead of something as vague as a time limit, you’ll keep your mind focused on the road ahead and what you need to do.
You might think that you’ve run out of ways to cut costs, but there’s always something you could stand to cut back on. Take a hard look at your own expenses and see where you could stand to cut back. Before you do this, make sure to sit down and plan out exactly how much cash you need. Having concrete numbers in mind will help you stay focused on your goals, and will help you make informed, purposeful decisions when cutting, instead of randomly cutting costs in ways that could end up slowing your development down even more.
Make sure that the areas where you cut costs are not harming your growth. That is, if you fire all the engineering team, you’ll end up with no innovation. On the other hand, there are always activities that you can postpone or renegotiate. For example, rent payments, buying machines or payment periods to suppliers.
2. Raise more equity
The Cash vs. Product race is essentially a competition between the amount of cash that you have on hand and the time that it takes you to get to a final product. This means that the best way to buy yourself some time is to secure more cash.
Never pass up the opportunity to get more cash. If there’s money on the table, take it! Don’t let things like worries about share dilution stop you. At this stage, it’s more important to make sure that you have funding secured for the future, and we’ve never met founders who regretted taking money when offered.
3. Get grants
Ideally, you should always be looking into opportunities for grant funding, but if you sense the money is running out and you haven’t already looked into grants or funding for climate projects, look now. And if you have looked before — look again. Is there something new you qualify for? Don’t self-reject at this stage. If you qualify, apply, apply, apply!
Depending on where you’re located, your government may also have funding available for climate projects (such as the EU’s Innovation Fund), which can be a good place to start. Non-dilutive funds are always available, and while grants can be competitive, you raise your chances of success by applying to everything that you qualify for. And remember, there are various routes to grant funding. Depending on the product you’re offering, you could look into finding donors as well. You could even partner up, finding a corporate foundation that recognises synergies with your core business. Get creative and start early. The best companies in our portfolio achieve a 1:1 equity-to-grants ratio.
4. Raise a bridge
This is one solution that’s often underutilised, and we find that founders think of this way too late. Bridge rounds are interim funding solutions for startups looking for a lifeline between major funding rounds. As the name implies, your goal is to build a bridge out of money to get you out of this crush. Successfully raising a bridge at the right time could be a lifesaver, but we emphasise that this has to be done at the right time.
Time is of the essence here. Successfully raising a bridge can take a lot of time, and if you’re already panicking about lack of funding, it’s probably too late to start. You’ll want to start working on this well before the desperation sets in, with at least six months of lead time. By negotiating from a position of strength, you can make sure to get more favourable terms and the best possible deal. If you’re lucky, you may be able to attract new investors at a higher valuation (e.g. a high SAFE cap ahead of the next round).
5. Increase revenue
At any stage, you should be looking for new ways to increase your revenue, but this is especially important when you’re facing disaster. Even without a product to sell, you can ramp up sales by collecting upfront payments from customers. You can make such payments more attractive by offering discounts, or building in free services (within reason) to an upfront payment.
You can also look into things like factoring deals, which means selling your outstanding orders or invoices for some amount. The company you sell your invoices to will take over collections, and you’ll still get most of the value from those invoices.
Another option is to offer consultancy services (such as pre-project planning). Or, you could look into forward carbon credit purchases. That means finding a buyer who will purchase carbon credits on the promise that your project will reduce emissions by a set amount. This does mean some higher risk for the buyer, so if you’re planning to do this, make sure to double and triple check all agreements before you sign them.
6. Raise funding based on traction, not product
This is one of our favourite approaches, especially in climate tech, where product development can take years. The idea behind this is simple. Instead of raising money based on your product, you raise money based on how much commercial traction you’re getting. This could mean raising money based on off-take agreements, which are pre-order agreements that allow you to buy or sell goods before they’re made, or power purchase agreements (PPA), which are basically the same thing but for electricity.
The key here is to encourage investors to take a chance on you even when things are still relatively early. If you build your facility, you’ll already have buyers in place, and your product, when it comes, will likely make a great return on their investment. It might take some time to crunch the numbers and ensure your stats are bulletproof, but this strategy isn’t as complicated as you think.
Our portfolio company, Reverion did exactly that. The company used a very simple playbook: collect down payments with signed contracts with costs in the high four digits to low five digits for each unit, allow both parties to back out any time, and use the resulting order book during fundraising to show off how much commercial traction they were getting.
Don’t underestimate the power of this approach. At Extantia, we believe that pre-order agreements are incredible tools, which climate tech companies can use to position themselves better for the next fundraising round. Using these tools properly can help you decouple product and traction and increase your chances of fundraising.
Final thoughts
Ultimately, the Cash vs. Product race is a challenge for every startup, and no matter how confident you are in your plans, you’re going to have to reckon with it. But we hope we’ve shown you that this challenge is not insurmountable. To win the race, you’re going to have to play it smart and reach for every opportunity you can.
Don’t get confident, or complacent. The steps we’ve outlined here might sound like a lot of hard work, but really, these are things that all founders should be prepared to do, at any time and ideally ahead of time. They require you to know things about your startup that you should already know, like where you can cut costs, your opportunities for equity-raising, who is most likely to partner with you, and most importantly — what your future product’s selling points are and how you can raise money based on your product’s potential and how much traction you can get. Understanding these things will help you not just survive the Cash vs Product race, but thrive in the competitive landscape that waits for you on the other side.
Remember, no matter what you choose to do, everything that can go wrong probably will. This is something that all founders will ultimately have to reckon with, but with careful planning and quick action, you should be able to avoid disaster.
