The concept of having a runway has its own set of maxims for startup founders. Investors we’ve interviewed generally agree that a successful fundraise should leave a startup with 18 to 36 months of capital, and by the time a startup has around 9 to 12 months of cash, it should start raising its next round.
But what should startup founders do when they see the end of their runway fast approaching, investors disappearing into the woodwork, and ever fewer ways to get more capital?
Historically, the most cited and repeated piece of advice has involved cutting costs, first and foremost.
But norms are for normal times. The economy hasn’t been this volatile for years together, and founders today have to almost run the table: strategically cut costs where it’ll hurt the least, manage headcounts to keep growing, keep a close pulse on how growth is shaping up and tune burn rates accordingly, and more.
Still, adages persist for a reason, and several investors agreed that cutting costs is still the best way to get more mileage out of your startup’s bank balance if a fundraise isn’t on the horizon.
“The minute a startup foresees some material slowdown in revenue or client decline, they should cut back costs, no matter what,” said Christian Narvaez, founder of Rayo Capital. “That would be the first step, and would help to extend your runway and give you time to fundraise. Secondly, if you’re running out of capital, think about what is happening.”
Kelly Brewster, CEO of bitcoin-focused accelerator Wolf, stressed the importance of acknowledging your circumstances, especially if they are dire. “There’s only a few levers you can pull. If you are down to just two to three months, you’re out of options. You should pay employees severance, [your remaining] tax bill, and shut down the company. Or, you may find yourself in a bad situation.”
Regardless of the outcome, if you have less than 9 months of runway, “you have to cut burn rate and let good people go, unfortunately,” said Qiao Wang, a core contributor at Alliance DAO.
The vast majority of startups’ expenses are human resources, or salaries, and reducing them is the best way to cut expenses and extend your runway, Wang told me. “Most startups just don’t need that many people. Most founders love hiring people before they have product-market fit. If they let a few people go, it wouldn’t reduce their likelihood of success,” he said.
Wang’s words ring true. These past few years are testament to the fact that companies often overhire, especially when hype, FOMO and optimism drive decisions instead of a measured consideration of what the business actually needs.
The best way to consider what’s necessary to spend comes from not scaling prematurely, according to a portfolio manager who handles more than 300 web3 portfolios. “If the product isn’t fitting [its market], don’t scale your business development team just yet. And the reverse is true: If you overscale early on, it’s better to reconsider. Do you really need a 30-person team or can you deal with less? The balance is around talent,” they said, requesting anonymity.
When capital is cheap, startups can often afford to forgo incremental revenue along the path to their planned future, but in more frugal times, taking advantage of near-term revenue opportunities while staying on the path to a better, well-planned future can help. So once you’ve snipped off those expensive branches, try to build revenue and focus on user acquisition, since that’s what will keep investors at the table when you go out to fundraise.
“I am looking for businesses that have a clear path to make money. I know it’s a ridiculous thing to say, but in startup land and crypto VC, specifically, we look for businesses that deliver something to their customers that they’re willing to pay for now, not after years,” Brewster said.
The web3 portfolio manager agreed: “Right now, to get investments, the requirements have gone up — it’s about prioritizing user attraction and having those locked in.”
Valuations devalued
During the last bull market, a lot of startups wound up overvalued, given the hype around startups (especially web3) and strong investor demand. But something else proved pernicious to startups everywhere: Deals got done quickly and easily.
As crypto startup valuations come back to Earth, big investors are bargain hunting
That set expectations for quick and easy fundraising rounds, but the reality is that due diligence is much stricter today. Investors want to hold their dollars close, which means companies low on cash need to remember that fundraising is a much longer process than it was 18 months ago. “Fundraising takes anywhere from 3 months or more in this market,” Narvaez said. “If you’re experienced, you can run a tight raise in 2 months, but it’s tough right now.”
Things are even harder for web3 startups, given the persistent uncertainty and bearish sentiment around the crypto industry. Macroeconomic conditions and regulatory uncertainty are playing against crypto startups’ fundraising hopes — crypto funding declined for the fifth straight quarter in Q2 to $2.34 billion. Interest rates are higher, making it more difficult for everyone investing, and major U.S. government agencies are cracking down on the crypto industry, too, which is further dissuading already wary investors.
Venture capital firms are also not raising as much capital as they used to, which means there’s less dry powder to deploy, the web3 portfolio manager said.
This means capital deployment has declined across the board and fewer checks are being written. The end result of this situation is likely that founders will have to settle for an unfavorable valuation, Wang said. “A lot of startups raised at really high valuations during peak bull market so they have unrealistic expectations on what they can get during this bear market. A lot are raising at the same valuation as two years ago, despite making progress.”
The bull market allowed startups to dictate crazy valuations because they could, Narvaez said. “Then they realized they weren’t thinking about Series A, Series B and Series C; they were just thinking about the now, and that hurt a lot of people.” Brewster also noted that he sees a number of flat rounds happening at startups that have grown and are able to raise at the same valuation as their last capital raise during the previous bull market.
Raising a flat or down round is “horrible for LPs that invested,” Narvaez said. But flat or down rounds may not be “attractive” to new investors if they do not receive a “massive, aggressive discount,” which puts startup founders in a tough spot, he added.
However, it’s not like the wells have run dry. Startups can raise capital, just not on the terms they — or their current investors — would like, the investors said. If flat or down rounds are not an option, a company that is trying to raise a Series A could do an extension round instead of something bigger “if it’s not 100% ready to hit that next level,” the web3 portfolio manager said.
There are other opportunities outside of fundraising, too. Startups can look to be acquired outright or via an acqui-hire sort of deal, Wang said.
So the consensus seems to be: If you don’t have to raise, it’s probably best to wait for more founder-friendly fundraising conditions. When might that be? We’re unsure, but Wang feels there will be better times to raise in a year or two.
Shutting down shop
If you’ve tried everything and are still running out of money but don’t have anyone coming to bail you out, it might be best to quit while you’re ahead.
It’s important to be realistic, Brewster said. “Startup founders tend to be optimistic, passionate and don’t listen to people telling them the things that can go wrong. They like to see the upside, and that doesn’t work well when it comes to funding. You have to be unemotional and objective about the numbers and data.”
“Unfortunately, a lot of startups will be dead,” Wang said. “That’s just the nature of the fundraising environment right now. I always say to our startups before they reach that point of no return — I tell them to not scale prematurely and overhire. It doesn’t increase your chance of finding product-market fit. Those startups are doing well, they have low burn and a lot more shots at finding product-market fit.”
Narvaez said he’s personally seen anywhere from five to ten web3-focused startups shutting down this cycle. “In all of these people I know and their post-mortem [businesses], there were decisions they could have made earlier.”
While he felt some founders were too confident and too cocky, he also found that seasoned operators who had been through previous cycles opted to cut the fat fast. “They act fast because they understand this is going to be a prolonged time. But the founders whose companies died, it was the first time they built through a bear cycle. As I mentioned, cut unnecessary expenses as much as you can.”
The sad reality to remember is that most early-stage startups fail, Brewster said. “A lot [of people] are wrestling with this. It’s the rule, not the exception, and it’s tough.”
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