How to extend your runway. Indefinitely.

By Krista Morgan, Stage GP

runway

A friend (and founder) called and said he was in a tough spot. An investor had committed to a sizable round, signed subscription docs, and then…bailed. With 6-weeks of cash, my friend wanted to know his options. The company was close to breakeven, but he needed a short runway to get there.

This situation happens so often.

The standard options are:

  1. Down Round with new investors
  2. Bridge or Down Round with current investors
  3. Some combination of the above and/or
  4. High interest debt

 

Almost every founder believes there is a fifth option: new investment on standard terms. When you are 6-weeks from running out of cash, that is an unrealistic strategy to pursue, especially if your existing investors are not actively working with you to discover new options.

Candidly, Stage Fund benefits from these situations. Not a single investor desires to be strongarmed into a commitment. Additionally, you cannot hide when you’re running out of cash. Debt, if available, only delays the inevitable. The company in need is out of options. Any fund or investor willing to bring a cash is primed for great deal.

The secret: there is almost always a fifth option.

a hidden bookshelf opening

You can cut to breakeven.

  • No, you cannot cut to breakeven and preserve all your growth opportunities.
  • No, you cannot cut to breakeven and keep all your people.
  • No, you cannot cut to breakeven and pay all your bills, keep every promise you made, or avoid hard conversations.

 

But that does not mean you cannot cut to breakeven.

When my fintech startup ran into fraud within our portfolio, the equity round (down round for the record) I was working on fell apart. Like all tech companies, the critical asset we had were our paying customers.

I discovered the fraud on a Friday afternoon. My leadership team was in the office by first thing Saturday morning figuring out what we could cut, by Monday, we let go half the staff.

It’s worth noting my sister was one of the people I cut, and she still invites me to Thanksgiving.

The only people we kept were those people critical to preserving revenue so we could give ourselves time to regroup.

We kept revenue going so we had time to work with our lenders and investors to orchestrate a soft landing.

My situation was extreme, however, if you asked me if I could have cut to breakeven the day before things fell apart, I would have told you “no.” I would have said I needed to keep pursuing sales, that I needed to keep investing in tech so I could deliver features my current customers wanted, and that I needed a strong finance team to help us raise money.

Cutting to breakeven is never the easiest thing to do. But once you do it, once you rip off the band-aid and go for it, it’s amazing how much easier things get. Once you tell yourself that growth doesn’t matter, surviving to fight another day is more important.

My partner, Dan Frydenlund, always reminds founders that if you don’t cut some people to save the company then you risk having to cut every person.

And I know you think extreme cuts mean you’ll never raise money. But you’d be amazed how much money there is for companies that have proven they can be breakeven. It’s so much easier to raise when you are not desperate.

We almost always make cuts post-acquisition. We listen to CEOs tell us there’s no way the company can survive, but we have example after example in our portfolio that fought the cuts and then found themselves in a growth situation within a year.

The advice I gave to my friend was to figure out what he had to cut to get to breakeven. Then take that plan to his existing investors and see if there was a deal to work out. Investors will respect that you are willing to do what it takes to preserve their investment rather than force a cram-down or recap.

In short, if you have 6-weeks of cash, use it to fund your own turnaround. Don’t accept the premise that more cash is your only way out.

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

More To Explore

Featured

Turnaround Venture Capitalists See Opportunity In The Current Downturn

Most startups don’t make it. While some companies fail because they are trying to solve a problem that doesn’t exist or trying to target a market that’s too small to produce profits, many falter because they aren’t growing quickly enough to attract or retain VC backing.

Featured

Innovation of the Venture Studio Model

A venture studio is a model for entrepreneurship that combines company building with venture funding. Given the success of venture studios for startups and investors, the number of studios has grown to over 560 worldwide. What differentiates the venture studio model? And what is the next innovation of the venture studio model?