It’s a difficult and confusing time to be an entrepreneur. People are relying on you. Investors may be pressuring you or showering you with advice (solicited or not). You’re reading expert opinions, and finding that many experts disagree.
We’re all yearning for a crystal ball. What’s next for 2020? A U-shaped recession. A V-shaped recession. Or even a W-shaped recession. No one knows with any certainty what’s to come. In a U-shaped recession, startups that survive will likely have slowed their burn rates and invested in ideas with some near-term ROI. For a V-shaped recession, it would be wise to focus on accelerating product roadmaps in ways that favor faster growth when conditions become more favorable. Should we see a W-shaped recession, volatility may make it difficult to make decisions. No matter the outcome, you need to know your runway and how to extend it to weather the uncertainty.
How to calculate your company’s runway
Your runway is the amount of time you can operate before being insolvent. If your cash flow shrinks but expenses don’t, your runway gets shorter. Increasing cash—by raising funds, for example—extends your runway. For most companies, runways are dynamic. The basic runway calculation is simple:
So a company with a monthly burn rate (that’s the amount by which expenses exceed cash flow) of $20,000 and $200,000 in cash has a runway of 10 months. Changes to cash flow and expenses impact your runway.
The advantages of a longer runway
It’s obvious: The longer your runway, the longer you can operate your business without needing to raise additional capital. You’ll generally be able to access more favorable funding terms when you don’t need capital and have the flexibility to wait until the deal climate improves. Rather than spend time and resources raising capital in a difficult time, you can focus your energy on value-adding activities, such as accelerating product development and investing in expanding your TAM.
Deal climate can make a huge difference in valuation. For instance, during the Great Recession, deal valuations fell by 27.3%. Right now investors have leverage to request more favorable terms from startups, including those that may be favorably impacted or not impacted by the public health emergency. Companies that are able to extend their runway in the near term may be prudent to wait for the right opportunity to secure their next round of funding.
Extending your runway by cutting costs
Expenses play a key role in your burn rate. Therefore, cutting expenses while maintaining cash inflow will extend the runway for your business. Travel, event, and entertainment expenses, which can make up a substantial portion of operating budgets at startups, have disappeared for many companies.
Personnel costs are usually the largest portion of expenses for most startups. That’s leading to some painful decisions that shouldn’t be made in haste. It’s important to reflect on the impact of personnel decisions on teams. For some, a hiring freeze might be enough. Many entrepreneurs are finding ways to avoid layoffs. For instance, some companies can consider across-the-board pay cuts in combination with a reduced work week. Others are opting for furloughs so when recovery occurs, ramping up again might be faster than if you had to hire new people. The SBA’s Paycheck Protection Program (PPP) provides loans that incentivize companies to keep employees. Many startups are eligible for PPP and have been successfully taking advantage of the resource. Other relief programs companies can explore are the Coronavirus Tax Relief for Businesses and Tax-Exempt Entities and Deferral of Employment Tax Deposits and Payments through December 31, 2020.
Build a longer runway with revenue-based financing
Investor funding or working with a bank may be top of mind for companies in need of a longer runway. You can also add cash by taking advantage of revenue based financing (RBF), term loans, and lines of credit. Lighter Capital provides each of these options, and we’re the leader when it comes to RBF. Not familiar with RBF? It’s the top alternative to dilutive financing thanks to startup-friendly deal terms. In exchange for financing, companies agree to share a percentage of future revenue. Payments vary with the company’s revenue, making RBF a flexible way to pay down debt in a time when customer payments may be down.
A provider of optimized IT management services, iOPEX turned to Lighter Capital to finance the company through a period of rapid growth without having to raise capital from a VC. More recently, the company tapped additional support from Lighter. iOPEX CFO Archana Srinivasan explains why: “In today’s uncertain times, it is prudent for all companies and any startup to focus on their cash position and preserve runway. Surviving this downturn and being able to grow again when it turns around is going to be the new measure of success.”
She adds, “We initially turned to Lighter Capital as a way to tap funding without diluting equity. When COVID-19 hit, Lighter proved to be a true partner. The speed and dexterity that the Lighter team brings has been amazing.”
Gain insight from analytics
Understanding your runway—and entire financial picture—can help you navigate these times, too. Lighter Capital is creating a data analytics platform for startups that provides a view into runways and other key metrics that are critical in understanding the health of a business. We built it for two reasons. It helps companies present their financial performance in a standardized format to investors. We also wanted to give companies access to cohort analysis that helps them understand how their company compares to others with a similar business model, size, and industry. The goal is to make cohort insights on all key metrics easier to come by. Entrepreneurs get a new perspective on how investors view their data. Looking ahead, investors will be able use the platform to manage the performance of their portfolio and find smarter opportunities to invest.
The platform is an ideal tool for startups in need of a deeper look at their runways and other key performance metrics. Give it a try. Connect with our team to learn more about the platform.