Miguel Fernandez Larrea, CEO and co-Founder of Capchase, discusses what founders should be doing today to manage liquidity, extend runway, and emerge at the top of their respective markets.
In recent months, it has been hard to avoid mention in the media of the tech downturn that is now firmly in evidence. After explosive growth and the sky-high valuations of last year, public tech stocks have been on a downward trend, driven by rising inflation and interest rates, among other factors. In just a short period, we’ve seen public software company valuation multiples contract approximately 60% on average and more than 80% in some sectors.
We are now seeing the private funding market slowing down. Recent data showed that in the US, Series A to Series C round sizes are lower, along with valuations of those deals. Founders, CEOs and CFOs are understandably increasingly nervous about how to adjust their approach in light of this change. They are looking at how to control costs and manage their capital effectively to extend their runway for as long as possible.
With businesses advised to aim for two years of runway if possible, many startups are looking to reduce headcount as an obvious place to start to achieve this. However this response can be counterproductive and ill-thought-through, damaging your ability to be prepared for the bounceback. There are alternative options to consider when it comes to managing cash burn and protecting the future viability of your business.
Laser focus on working capital requirements
There are many ways founders can look to preserve runway without turning to external capital injections. In the first instance, finance teams should conduct an in-depth analysis to understand where to invest capital or pull back on spend for the greatest contribution to margin growth.
Scenario planning needs to be held early and frequently to stay in control. At Capchase, we recommend that founders switch from occasional financial planning to a monthly cadence, at a minimum. That frequency allows businesses to see ahead of time when there is a need to pivot quickly.
Businesses must also ensure that capital planning and forecasting are closely aligned across all teams. Company-wide coordination will help to keep everyone on track with company-wide goals. That approach allows any problems or areas for optimisation can be spotted at the earliest possible stage.
Some areas that founders can focus on for runway preservation include cash cycle improvement, advancing receivables and delaying payables as far as possible. Businesses should also look at tools for getting shorter sales cycles, faster. This might include:
- Selling more short cycle products to generate cash
- Upselling and cross selling to customers
- Introducing or enhancing CRM usage.
It is also important to keep a close eye on all your expenses. Make sure customer acquisition costs are streamlined, suppliers are truly necessary, and explore opportunities for tightening across the board.
Put a renewed focus on your unit economics. Ensure that every dollar of customer acquisition spend generates more than double in contribution margin. The idea is not to discard growth, but to focus on careful growth through effective customer acquisition, making sure you do not grow with a ‘leaky bucket’.
Work to maintain your key asset – existing customers
Of critical importance for a SaaS company is recurring revenue. Making sure you retain existing customers during uncertain times is vital. Your customers are likely facing similar market challenges, which could impact you.
In recent years, startups could focus on growth without thinking much about the risk of losing customers. Cheap capital has been relatively easy to come by, and consumer sentiment was high. Times have changed, though, and startups need to turn their attention to managing risk, and dig deep into how to avoid it. Using the data available to you, you can conduct analysis on customer profitability and satisfaction, for example, and assess those most at risk of leaving.
If you understand your churn risk, you can prepare mitigation strategies if you see increases. Prepare your customer service team for tough discussions with customers. Ensure you have a playbook in place for what to say, ideally tiered by size and strategic importance of your customers. Consider proactive outreach, discounts, or payment holidays.
I would also suggest that you revisit your approach to new products as a team. Focus on products you can launch with a short selling cycle, and uptake from existing customers, as opposed to products the business would have to sell from scratch to a new customer base. Using this approach, you can also continue adding value to your customers. Ensure their loyalty by focusing on their needs, which will improve your metrics and valuations.
Consider alternative financing options
Any fundraising should be planned months in advance. You will need to lower expectations of what you will get from new and existing investors. Traditional funding sources may be harder to come by than in recent years; however, it is important to remember that the startup scene is not entirely reliant on VC capital to fuel growth these days.
In 2008 the collapse in funding meant that new startups were hobbled, failures were exacerbated, and growth severely curtailed, with viable startups unfortunately caught up in the storm. With no way to extend their runways they had to make deep cuts which damaged their businesses and made recovery difficult – and in some cases, impossible. Not only did this prolong the recession, it also helped cause a domino effect that impacted almost every tech vertical.
Now, we have a large and rapidly growing alternative financing scene. There is a solid range of choices for viable startups to continue to get capital. Although many alt-finance startups receive capital from VCs, most have built up huge war chests of credit over the past few years. Make sure you are aware of, and understand the range of financing options available to you. They must be suitable for your business needs, stage and risk profile and engage early with different providers to understand their offers.
Focus on what is in front of you
The key to managing this downturn is focusing entirely on your circumstances. Block out the noise from the wider market and instead talk to your existing customers and team to see what is practically happening. Do use this period as an opportunity to see where operations can be streamlined. For example, consider making temporary reductions in expenditure: freezing peripheral activities, for example, like team parties and business travel. Ensure your existing customers are happy. Finally, consider how to pursue a more aggressive sales or marketing strategy to support continuing growth.
The market uncertainty will pass at some point, so if you continue working on upping your valuation and motivating your workforce, you will emerge with a healthy runway and track record of responsible growth.
Capchase is the growth partner for ambitious software-as-a-service (SaaS) and comparable recurring-revenue companies. Our mission is to help founders and CFOs grow their businesses faster through non-dilutive capital, market insights, and community support. Founded in 2020 and headquartered in New York City, Capchase provides financing by bringing future expected cash flows to the present day – thereby securing funding that is fast, flexible, and doesn’t dilute founders’ ownership. To date, Capchase has added 5,000+ months of runway to the SaaS industry. It launched Capchase Analytics earlier this year, allowing founders to make real-time financial decisions based on their businesses performance.