We are all having a rough time early this year when COVID-19 impacted all our businesses and jobs that pose a threat to a global economic recession. Not only are those big companies being affected by this pandemic but also, the most affected are the small business owners or startups that are less stable financially. With this, companies need to consider the projection of negative cash flow which can be survived or dealt with by doing two thing
- Make a profit
- Make a certain amount of runway
1 – Make a Profit
Find a way to make profit no matter what it takes for your business. It feels great and reassuring to find leverage despite this time of crisis. By doing this, you don’t need to raise funds unless it’s essential. But how to make a profit? It will mean hiring and building slowly but surely. If you get the support of venture investors (VC or seed investment), and they funded your startup, then you are lucky, can expect a huge and positive outcome. However, you need to plan the worst in times like this. Sometimes, your competitors are also backed up by other venture investors, and they even invest more money aggressively. If they’re smart enough and they know what they’re doing, most likely, they will generate a massive impact on the business that will cause popularity or brand recognition and even extend its social network effects. Hence, they will win the competition and get further ahead.
2 – Make a certain amount of runway
No one knows how long the recession will last, but it’s still crucial to make a certain amount of runway. There could be miscalculations, and maybe if really unlucky, you will realise you only have 18 months runway instead of 24. Or say perhaps you have 24 months of the cash flow, but the market capital is getting worse. These are some of the possibilities we must consider because they do happen in reality. We know that it will take long to recover from this massive pandemic. Given the current scenario, we can look into planning beforehand for the global recession to last in two to four years.
What is the ideal strategy for a startup?
There is no ideal strategy. You can think of several ways on how to make a profit and plan on how to make a certain amount of runway. Neither of the two mentioned above ensures success, but at least you can try.
For startups, the ideal tactics are some of the following:
- Decide whether it’s 24, 36, or 48 months amount of runway or a cashflow you want to keep.
- Adjust the net burn annually in such a way that it’s always at this level.
- Reduce your costs or spending and reduce your net burn-rate through profit-making or focusing on growing your revenue. Ineffective marketing and fast hiring could also increase your net burn.
Simple as it may seem, this strategy gives a clear message — to grow the company despite the recession. This strategy will create positive outcomes for your startup:
- Even when the market capital doesn’t recover, you don’t have to worry.
- Also, when the strategy was carried out the wrong way, and you don’t have to worry.
- When your company growth resumes, you’ll reinvest in your company continuously.
What monthly amount of runway should founders keep?
In case your cash funds are not enough, it’s safer to choose at least 18-month runway. But when you’re currently making a lot of profit and raised a massive amount of revenue, you can decide the 36 months runway. Beware and take note that the longer the runway or amount of monthly plan, the easier it is for you to keep that monthly runway. For example, you’ve chosen the 18-month runway, then always take note to decrease the net burn annually by 50% to keep that 18-month amount of runway. Similarly, if you’ve chosen 36-month runway and look to decrease the net burn at least 25% annually. This is how it looks like when you have $10M funds, and you’ve chosen the 18-month runway plan. You will notice that you never run out of cash, as you’ve chosen 18-month amount of runway.
In the year 2020, it means you can increase the net burn up to $417k each month. However, in 2021, you need to decrease the net burn by $208,000 each month. This is like growing your yearly rate up to $2.5M. Make sure you know that you can do this otherwise it will be very risky for the company and subject to lose.
Similarly, in 2020, you can increase the net burn up to $208k each month. You can only reduce the hiring in your company by following this plan. In the year 2021, you will decrease the net burn up to $52k each month. This is a lot more doable compared to the 24-month runway.
How often do you change the net burn?
You can change the net burn annually. As time goes by and the market also changes rapidly, you can adjust the net burn as frequent as possible or quarterly.
Is it necessary to adjust the startup revenue forecast?
Revenue or profit is uncontrollable, but you can have full control of costs, marketing, and hiring. Startups need to adjust their revenue forecast before cost reduction and growth revenue strategies. In this way, companies can also decrease the net burn rate. It’s easy as obtaining your current funds and a certain amount of runway to keep.
The impacts of COVID-19 can still be felt at the moment. We will all be struggling with our health, jobs and startups to stay on top of it. We’re still figuring out how to cope with this crisis, and the last thing we want is to continuously suffer a global economic recession. Companies are striving to keep businesses intact, especially for small startups as they need to keep feeding families and at the same time, grow their business revenue. Making a profit is hardly impacted by the current pandemic. It does look like this will be the scenario in the long run. Choosing a certain amount of runway will be useless just in case this recession continues for a long, long term.
The ideal strategy is to pick a certain amount of runway to keep and then change the net burn frequently. The success of winning this battle and for thriving startups is running this strategy of choosing an ideal runway and keep it going.