Let’s imagine that you are the founder of a company that has successfully raised an angel or institutional round and are currently in a situation where you have 12 months or less of runway.
The hardest part of dealing with a low runway situation is managing your own psychology. You have to simultaneously manage your own anxiety to not be overly negative about your prospects, but also not be irrationally positive. It’s a delicate balance.
If you are Default Dead then it is your responsibility as a founder to immediately take actions to become Default Alive. The mechanisms by which you can move from Default Dead to Default Alive are straightforward: Either you need to grow revenue more quickly, cut costs, or both.
Founders can get caught in a thought cycle which causes inaction and an inability to fix the situation they are in.
Here are some common counter-productive ideas:
- The Fatal Pinch does not apply to me
- Investors will continue to fund my company if I run out of money
- If I fail at fundraising I can just sell the company
- My conversations with potential acquirers or investors are very far along and likely to happen
- Acquirers won’t buy us if I cut costs
- My employee morale will plummet if I cut costs
- New investors won’t fund us if I cut costs
Don’t let these ideas be the justification(s) for why you choose to remain Default Dead.
Understand your leverage in a negotiation
What can we learn from the above graph?
- Delaying taking action to reduce burn is a bad strategy. Make changes to become Default Alive now.
- From a game theory perspective, an investor or acquirer is best served to stall and drag you along until you have no leverage at all. An opportunistic acquirer or investor is unlikely to say “no” outright, and will keep their options open as you become increasingly desperate.
- If things looks bleak now and you take no corrective action, it is overwhelmingly likely the situation will get worse, not better.
Some tips on reducing burn
If you want to reduce burn, the least painful thing to do is make a lot more money immediately. Hopefully you have been trying to do this anyway.
But what if immediately dramatically increasing revenue to become Default Alive is not possible? You must cut costs.
Real estate/lease costs are binding agreements and very difficult to get out of. Real estate obligations are a common cause of death for later stage companies.
Payroll costs are the most likely source of high burn scenario. As mentioned in The Fatal Pinch, over-hiring is usually the root cause of high burn. If you do choose to reduce staff it is imperative to treat your former employees well. You should also be transparent with your remaining employees. Remember: You should always treat your staff as you would want to be treated.
The easiest things to cut are things like PR and marketing expenses, as well as random incidental spending on perks/parties. Don’t blow your money on this stuff.
The point of no return
So what happens if you have less than three months of cash? It’s important to face the issue head on and account for your liabilities and the scenario of shutting down your company.
In many cases, <2 months is the point of no return. If you are in this state it is immediately necessary to lay off your employees and give them severance, pay down your obligations, and use your remaining cash for shutdown costs. If you don’t do this and instead end up with zero cash and outstanding payroll, tax or other obligations, things will get Very Bad.
Some things to consider at this stage:
- When you hit the point of no return, you should shut down your company.
- Do not become insolvent. Pay your debts. You must pay your tax and payroll obligations.
- In especially messy scenarios you can end up with personal liability. Consult with your lawyers regarding how to do an orderly shutdown.
- Don’t drag things out and end up in a no upside situation: no upside for you, for your employees, for your investors, or for your customers.
Even if things go poorly, behave in a way you would be proud of.
It’s tough to be a founder in a low runway situation. Get support and advice where you can get it. Mentors and advisors can help you navigate through these times. Often the toughest thing for a founder that has made it this far is to “admit defeat.” If you are worried about your reputation, keep reminding yourself that it’s just as important to handle situations well when things go poorly as it is when they are going great.
In closing, if you remember nothing else, remember these two things: 1) don’t lie to yourself and 2) act quickly and decisively.