Options to Consider as You Navigate the Market Reset

1.Burn Multiple > Burn Rate.
Reducing burn to manageable levels is now table stakes. But cutting burn is a means to an end. Focusing on a specific percentage (i.e. we will reduce burn by XX%) or a specific monthly target (i.e. we will target a monthly burn of $XXX) is not necessarily the right approach if made in isolation. You ultimately want to prioritize surviving these choppy waters and then telling a story of capital efficiency on the other side.

Founders and VCs are increasingly paying attention to the burn multiple, which is calculated as follows:

This quantifies how much each dollar of burn generates in incremental monthly revenue (MRR for SaaS companies, average monthly revenue for non-SaaS companies). Here is a hypothetical way to think through your burn multiple.

• Think about burn rate as your implied break-event point. For example, if Startup ABC is expecting to add $2M of ARR for the year, this is the implied break-even point over the next twelve months and is therefore an appropriate base for a thoughtful discussion around burn.
• Simplify this by thinking about the ratio in monthly terms. If your burn rate is roughly at a steady state throughout the year (i.e. no expected sharp increases or drops) you can compare this to your estimated Net New MRR. In the example above, Startup ABC’s $2M of net new ARR will equate to roughly $165K of net new MRR ($2M/12).
• Balance short-term cash with long-term efficiency. If Startup ABC is expecting to burn roughly $350k a month to generate $165k of net new MRR per month, it needs to adjust quickly if it has less than 12 months of runway (i.e. the Company will require external capital). Startup ABC must adjust burn or it will run out of cash before breaking even. However, even Startup ABC does have more than 12 months of cash, its burn multiple is roughly 2.1X, and should still consider adjusting the burn to show more capital efficiency.
• Other considerations. Cutting the burn rate to a level that ensures you reach break-even is a good idea in a difficult fundraising environment. For example, Startup ABC can cut its monthly burn rate to $165k to show strong capital efficiency (i.e burn multiple of 1x) and help extend the runway. But there are important practical considerations. Can the company reduce spending while executing the plan to add $2M ARR for the year? Can the company reduce headcount and maintain low churn of the existing customer base?

There is no one-size-fits-all, but the point is to be thoughtful in setting the burn rate target. We are seeing more and more companies using the burn multiple as a guide.

2.Sweetening the Deal for Channel Partnerships.
If you have established channel partnerships, chances are these channel partners are also adjusting to weather the current conditions. They are likely shrinking headcount, reducing expenses, and optimizing relationships. One consideration is to strengthen your relationship with these channel partnerships by “sweetening the deal”. If for example, you have a revenue share relationship or commission-based structure, consider increasing the share or commission to your partners. This could mean less revenue per deal in the near term, but it could also translate into more deals as well. It could also better align you with your channel partners over the long term.

We see companies taking different approaches to this. Here are some examples to think through:

• Offering temporary incentives with sunset clauses. For example, make it clear that the new incentives will apply over 24 months. This will allow the more generous offer to sunset automatically.
• Tier-based compensation structures. Offering higher tier-based compensation structures that increase revenue shares for deals above a certain ACV or a certain number of deals closed per month.
• Consider professional services as a sweetener. If your company earns professional services for integration, consider adding or increasing revenue share to channel partners on these services. Again, this can enhance the average revenue for your channel partner and perhaps gain more mind share.

3. Optimizing Pricing.
This might sound counterintuitive given the market conditions, but this is exactly the time when you want to ensure you are optimizing pricing. In a market that paid a premium for growth, companies were willing to underprice to gain market share. However, in a market that is rewarding capital efficiency and strong unit economics, it is important to revisit pricing and ensure that your product is in line with the market.

Increasing pricing can be tricky. There is a high chance that any increase will result in customer attrition. However, here are some ways companies are thinking through their pricing strategies:

• Target features with the highest engagement. Analyze client engagement across all product features. Determine which features are making your product stickier. These features could be less price sensitive if they add the most value to your customers.
• Introducing new tiers of pricing. Alternatively, determine if there are highly used features that you did not originally consider in the pricing. If that is the case, you can introduce a separate module/tier of pricing highlighting those specific features in the new pricing tier. Some companies have also added “Concierge type pricing tiers”, which can include integration and more dedicated customer services/maintenance solutions. Interestingly, some companies appear to be finding success here because their enterprise clients are also shrinking headcount/optimizing resources.
• Rethinking freemium models. There are some long-term benefits from a freemium model as you get a wider user base which can provide more data on improving your product. But given the importance of generating revenue and cash flow, consider shrinking the time of free trials or eliminating the freemium model altogether.

4. Redirect Employee Incentives Towards New North Star.
This might sound counterintuitive as well given that the balance of power in tech labor is shifting. But if efficient execution is key, boosting founder and employee morale amidst all the negative headlines are critical. Here are some ways companies are enhancing employee incentives to reward key performers, while protecting cash runway.

• Enhanced performance stop options. This can be tied to the company, group and/or individual performance relative to key milestones that move the needle. For example, they can be tied to “stretch goals”. Alternatively, they can be tied to the new north star of the company: “capital efficiency”, i.e. rewarding those that produced the highest results while remaining within budget.
• Increase commissions for the top sales performers. This is analogous to the approach taken with channel partners and can be tied to salespeople who bring in larger ACVs, most new accounts, or effectively upsell customers to new “concierge-type pricing tiers”.

We hope these ideas help you think through options on how to navigate the current environment. If you have other suggestions/initiatives underway, please share them so that we can continue to support our founders as best we can.