10 Steps to Extend Startup Runway

The life of a startup is dynamic and challenging. The first few years of operation abound with uncertainty and, unfortunately, many companies fail in their early or later years for one simple reason: they run out of cash.

From the very first day, startup founders face the task not only of raising capital, but also of deploying it effectively to achieve growth and profitability. Even though many founders are experts in raising money from venture capital, market conditions sometimes complicate this effort. In times of instability, they need to be equipped with suitable liquidity strategies to expand liquidity and sustain a real business.

Founders can follow these 10 steps to rapidly expand liquidity, readjust their budget or simply maximize their bottom line:

1. Runway Scenario Planning

Developing a framework for planning different liquidity scenarios is an excellent starting point when it comes to liquidity expansion. Entrepreneurs should assess their overall position in relation to burning cash and generate the appropriate strategies, considering different macro scenarios they may not be able to control. The Sequoia capital matrix for COVID-19 is a good illustration of how the model ought to be.

2. Measure Operational Efficiency (Net Working Capital)

Entrepreneurs can implement diverse strategies to contend with limited cash, enhance their financial performance and secure funds for their most urgent needs in the short term. Net working capital is the key metric startups have to consider for measuring the liquidity and operating efficiency of their operations.

3. Re-evaluate Capital Expenditure (CapEx) and adjust accordingly

Even though capital investments for expansion are crucial for the growth and scalability of any company, when budgets are tight, a more conservative approach is recommended. Plans to acquire machinery, real estate, or any other fixed assets should be postponed unless they are urgently required. Startups should focus on growing with limited resources and maximizing their available capacity.

4. Re-evaluate Operational Expenditure (OpEx) and adjust accordingly

As the company begins operating, the majority of its profits are allocated to OpEx, which means that the startup will only pay for its immediate needs.

Some of the actions to minimize these expenses are:

• Use a coworking space instead of a whole office
• Lease equipment and machinery in the initial years
• Finance IT services through a pay-per-use model
• Minimize payroll expenses by outsourcing IT staff, as well as accounting, legal and marketing services.

5. Cut or restructure secondary business lines

In times of survival, suspending expansion plans or the exploration of new business models is recommended. Efforts should focus fully on achieving a minimum viable product and product/market fit, if this has not yet been accomplished. Aiming to gain traction and growth in the main business, as well as consolidating the client base, must be a priority.

6. Evaluate Factoring Solutions

Access to financing through factoring will ease the burden of collection and payment activities. These institutions do not usually charge any upfront fees and will provide liquidity for accounts receivable or employee payroll (reverse factoring) in exchange for a financing charge. Factoring is generally a recurring way of financing business operations.

7. Leverage from knowledge

Most new companies unintentionally collect relevant information that could be useful to other agents in the industry. Selling knowledge (i.e. data, information) can be an additional source of income. Providing consulting services can generate additional cash to mitigate the lack of liquidity.

8. Become data driven and optimize management and operational costs

We recommend implementing a data-driven approach, streamlining processes for lead generation, customer management and employee productivity metrics, and converting data into processable information to assess performance. Data can be used to assess sales channel efficiency, measure and optimize existing processes, and reevaluate the effectiveness of the market launch strategy.

9. Seek support on industry players and stakeholders

There are numerous corporate and government social support initiatives to help companies navigate these uncertain times. A series of players focused on guiding startups in the implementation of the appropriate strategies for their businesses can be available through financial aid or administrative resources and mentoring.

10. Raise capital or bootstrap

Startups can raise additional capital to mitigate strains on liquidity and navigate the next round more consistently. They should look to existing rather than new investors when it comes to expansion rounds, since they are normally more willing to make subsequent investments under the terms of previous rounds. In the early stages, startups can consider bootstrapping, which means investing their personal savings, hiring a mortgage creditor and financing their own business operations. 

Bonus: Re-evaluate and update consistently

All prior actions should be measured and constantly reassessed during periods of uncertainty in order to guarantee effectiveness. Readjusting budget and expenditure strategies should be carried out accordingly. The ultimate goal is to increase liquidity and have a continuously profitable business in the long term.