Comprehensive Guide To Extending Runway For Startups
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Cash is King. That's true now more than ever...As a startup in this environment, it's all about extending your runway. Below is everything I know as a founder of a bootstrapped 8 figure company on extending runway while staring death straight on multiple times.
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Negotiate Better Terms With Vendors
Seek Non-Traditional Cap Sources
Create Incentives For Customers To Pay Sooner
Create New Products And Services
Pay Contractors Based On Performance
Increase Hurdle Rate On Investment
Use Recent Date For Forecasting
What Is Runway?
First off, what is a runway? It's essentially how long your cash (and the cash you will continue to generate) will last you before hitting $0...then it's game over. Well, kind of...that's what bankruptcy is for. But let's avoid that mess altogether and start executing, here's how to get started. Below I outline a comprehensive guide that we used at SwagUp.
How To Not Die - Extending Your Runway
Build A Cashflow Model
Without one it's like shooting darts in dark and it can really mess you up mentally. Are things better than they seem, worse? Do we have 6 months, 1 month, and 1 week? What needs to be true for us to be able to sustain til a certain point? You need to be able to answer these questions.
It's simple, open up a Google Sheet (not sponsored*), creating the following columns Starting Balance, Proj Inflows, Proj Outflows, and Ending Balance. Start building in some assumptions based on when cash enters and leaves your business
You can set this up daily or weekly, depending on your situation, but you need to have some sort of model like this that you look at all of the time. Play out different scenarios. When do you get o $0 based on certain assumptions? How much do you need to raise to plug gaps?
I'll stop here as there's more to it and others such as Michael Girdley have written twitter threads about this. Once you have this model in place, now it's time to fix the issues and extend the runway.
Improve Gross Margins
Strong gross margins cover up a lot of sins. Think about every dollar of gross profit as an extra $1 to cover your overhead. This is probably the highest leverage thing you can do. Attack it from both sides, pricing, and cost.
On the pricing side, when was the last time you changed pricing? Are you testing here? Have you created a more premium offering with additional services that don't cost you much? Does your pricing accurately reflect your costs? Do you know your costs?
If you are an e-commerce brand, have you negotiated with your vendors? Prices are coming down for a lot of their inputs, are they passing these down to you? Why not? Suppliers are losing power right now, it's time to negotiate but also be a good long-term partner.
Shipping can be anywhere from 10-30% of your COGS, have you optimized here? If you haven't done extensive RFPs or aren't using a carrier or method that you didn't know existed 12 months ago, you are likely losing here. Inflation aside, we've brought our costs down here over 20%
Negotiate Better Terms With Vendors
Related to the above, if you have demand, you have leverage...at a minimum, you should be Net 30 + CC (no fees) Time value of money is real, if you flex up or down here it has a cost CC over ACH all day (extra 30+ days + cashback).
Use something like Ramp to get cash back on all purchases + extra time to pay back + leverage PO financing (ie Ramp Flex). If you need some extra time to pay your vendors (APR might be high, but in absolute dollar terms it's not much).
Make The Tough Team Cuts
Every company is over-hired. Every company has a degree of fat. The strategy has shifted, and certain investment areas don't make sense right now. Stay lean In addition to gross margin, this is the highest leverage thing you can do.
It's all about gross margin and overhead Incremental gross margin means you can cover more OpEx Lower. OpEx means you don't need as much GP/margin to cover expenses. People are companies biggest expense, typically.
Most will be hesitant to do this, for the optics, for the culture, but it beats being dead. Plus most won't cut enough and have to do it again. That's what hurts culture most. Identify your building blocks, make sure they are bought in, cut, and build around them.
Give them more responsibility, give them more equity, and hold them close, you need their help to navigate choppy waters. But always keep in mind, as tough as it is to hear, everyone can be replaced, including me, and that's ok. Get things on track, maybe you can hire some back.
Maximize Your Credit
Leverage multiple credit cards and cycle spending around to maximize credit. You need to have a handful of credit partners you work with. Stack a few cards to increase overall credit and set different statement dates to optimize DPO (Days Payables Outstanding).
This can get a bit tricky day to day, you need a scrappy finance team that knows how to shift spending around in an optimal manner. But don't overlook this, in general. When you pay bills, how you pay them can be the difference between making it or breaking it.
Seek Non-Tradition Cap Sources
Look for non-traditional capital sources Of course, bringing in the capital is one way to increase your company's runway. That said, don't rely on it, if you want to control your destiny + it will make raising easier.
Typical VC and PE is hard to come by right now, the bar has risen much higher and a lot of their capital is going back into existing portfolio companies. Look into Revenue-based financing companies, family offices, or strategics (such as your vendors or bigger cos in the space).
Any of these options is going to be expensive and there's no one size fits all answer as to which route makes the most sense. That said, now is not the time to hoard equity, nor do you want to saddle yourself with large interest payments anytime soon going into a weak economy.
Create Cost Saving Culture
Create a culture of cost savings and avoidance. Make this very clear in your all hands, one of our top priorities is reducing costs throughout the business and provide examples. Highlight wins each week. Empower the team to think like an owner (they probably are).
You'll be amazed what your team is capable of. We were able to shave about $400k/month out of the business across various areas driven by the efforts of our team. Hosting down 40%, shipping supplies down 40%, etc. It becomes fun to a point.
Check Your Platform Costs
Analyze your software spending closely and move to monthly payments. We had literally 150 diff software platforms...why? Some don't even get used or just one person uses it or is redundant. Nothing bothers me more than shelf-ware removing non-essential tools, people will be ok.
If anyone wants to bring in a new tool, add friction to the process, or make it hard. Anytime you layer in a new recurring expense it should be a big decision. These are the expenses that are hard (legally impossible) to shake. Turn off auto-renews, avoid annual upfront.
Create Incentives For Customers To Pay Sooner
Push customers to pay sooner. Create incentives to early pay or simply ask if they can - if you have something people want enough they will push back on their finance teams. Maybe create a rebate where they get credits for future spending if they early pay.
The sooner you can get your customers cash, the better, you want to be able to borrow from them at no cost to you. Cash Conversion Cycles - study them and optimize them.
Create New Products/Services
Create products/services w/ favorable cash conversion cycles. Related above, is there something you can do to alter your products or services where getting paid more upfront is natural? For example, we allow customers to fill their accounts with credits for future charges.
Decrease Payback Periods
Decrease payback periods on your marketing spend I’m not saying to cut off marketing, but if cash is tight you need to understand how long it takes you to make that spend back. If you don’t have granular data here, fix that ASAP, we need to know what works.
Look at your spending vs the gross profit that spending is generating (not revenue!!) and how long it takes from spending to collecting enough GP to cover spending. Is it within 30 days? 60 days? The longer it extends the more you are financing your customers on the Hope LTV > CAC.
In an environment like this, hope isn’t a strategy, we want quick, predictable paybacks until you have enough of a cushion to move further out on the curve. Monitor spending closely, a lot of it doesn’t lead to anything and kill those quickly 80/20 rule likely applies.
Barter Services
Barter services with other startups Founders are creative folks, reach out to the founders of products/services you need or use - see if they’d be open to trading their product for yours, or doing some sort of in-mind discount. We’re all in this together!!
Shift Fixed Cost To Marginal
Shift fixed costs to marginal expenses so you can scale up and down more easily. If things slow down, having lower fixed overhead makes it easier to maintain profitability. On the slip side if you are growing and can only keep up by layering in more fixed cost and CapEx.
That’s going to get expensive and add more risk to the business. Marginal costs may be more expensive on the unit level but flexibility has value. You don’t want to get caught flat-footed.
Analyze Refunds & Credits
Analyze your refunds and credits, understand the root causes, and fix them. These are silent killers - how does your team decide on refunds, who has control, and what is the cause? Stop the bleeding here as it goes straight to the bottom line + drives retention.
Shift Cash Comp
Shift % of cash comp lower and increase equity and/or performance-based comp. If you have the right people on the team, they will be down for the cause and ok with this Be transparent and make it a “when we win, you win” situation. If you can keep your "A" player, while also lowering monthly cash outflows and creating more upside for the team, everyone benefits. Plus, it lights a fire under everyone to make progress vs collecting a paycheck while things burndown. Some people won’t be able to take the cash hit based on circumstances.
Pay Contractors Based On Performance
Work on success fees with contractors vs fixed ongoing rates. If you are going to use some sort of outsourced service, instead of layering in a fixed ongoing cost, try to tie their comp to the successful completion of the task or initiative. Don’t add costs without results.
Increase Hurdle Rate On Investments
Increase your hurdle rate on investments This is similar to the marketing spend point above, marginal savings aren’t enough, and savings that take 12+ months to realize don’t help you here. You’re running out of cash. We need higher or quicker ROIs at this point.
Additionally, you need to compare investments to the opportunity cost of how else that capital could be used, when capital is abundant we forget this point and spend on anything that looks like it will have an ROI.
Use Recent Data For Forecasting
Use more recent data for forecasting and modeling. What happened 12 months ago doesn’t matter, things have changed, and you’re most recent 2-3 months is more indicative of reality - adjust accordingly. Many businesses assumed growth - that growth never came.
Don't Cut Off Investments
Don’t fully cut off investments. At the end of the day, increasing runway comes down to Increasing Revenue Expanding Gross Margin Decreasing Costs. You can’t just cut your way to these things, you need to continue to invest in the driver.
If you can push on revenue, while pulling on costs, you can attack the problem from both angles and make meaningful progress. Don’t feed yourself by cutting off your hand… But always stay alive to live another day.
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