Don’t Drive Off the Cliff: Use Your Cash to Your Advantage
Evan Xie

Don’t Drive Off the Cliff: Use Your Cash to Your Advantage

What’s the best way to land a plane on a short runway? Maintain control of your descent. The same logic holds for early- to mid-stage startups that are facing harsh financial conditions in 2023. Research from the end of last year found that 81% of early stage start-ups have less than 12 months of runway left. Yikes. Pair that with the current post-SVB venture investment freeze, and it paints a stark picture of what’s ahead.


A huge number of companies are going to be scrambling to find the emergency exit this year, as macro conditions make growth more challenging, and a dearth of venture capital means you need to move more quickly than ever.

If you’ve been grinding on your startup for years and haven’t found product/market fit, you have a critical decision to make now that capital is hard to come by.

You can keep doing what you’ve been doing, pivoting and hoping to find product/market fit. Eventually you’ll need a new source of capital to keep the lights on or a strategic acquirer when you’re at the end of your runway. You could also shut down the company and return cash to your shareholders. There is another option, though. You can flip your mindset and think like an investor to give yourself a more graceful landing.

Imagine, for example, a Series B stage startup with $20 million of cash, but burning $2 million a month. The company has 10 months of runway, is not likely to be able to raise a Series C, and does not yet have a path to profitability with its current business model. Instead of continuing with the current path and driving off the cliff when the 10 months are up, the company might consider cutting burn to almost zero, and sitting with its $20 million of cash.

In this hypothetical scenario, the startup could then try to find another company to merge with, providing its intellectual property, its user base, whatever team members remain, and most importantly its cash, as consideration (and leverage) in the merger. The $20 million of cash is something other companies want desperately in today’s market. Rather than driving off a cliff into a complete winddown or a small acquihire, this company could end up owning 25% of some other company, providing a clear path forward and a real chance at redefined success.

If you find resonance in this cautionary tale, remember: there are a lot of great potential acquirers out there who have found product/market fit and are scaling rapidly, but still can’t raise a venture round in today’s economic climate. These companies are looking for cash wherever they can find it. Said another way, they might have product/market fit but not enough cash, and you have cash but no product/market fit. Seems like a decent marriage, right?

If you’re a founder with cash on your balance sheet but no path forward, you have a unique opportunity to think of yourself as a venture capitalist and “invest” your company’s cash and equity into a new business.

So how do you do this? The key is to move fast and preserve your cash.

  1. Bring in the board. Have a frank discussion with your board and lead investors to decide if it’s time to call it quits. Most investors have seen a number of companies wind down or go through M&A exits, so they can be a great sounding board as you chart a path forward. They can also be great leads for potential acquirers and facilitate introductions.
  2. Slim down. In order to preserve your greatest asset—your cash—you unfortunately need to reduce burn everywhere you can including marketing, software spend, and headcount. Ideally, your ongoing costs should be minimal.
  1. Make a list. Think of all the companies in your space who could see acquiring your company as a good strategic move. Who do you respect most in your industry? Are they in a position to grow, and could this move turbocharge that growth? Who might benefit from the expertise on your team?
  1. Start the conversation. Once you’ve brainstormed, mine your contacts for warm intros and begin talking about your collective options. The M&A process can take a long time, so the sooner you get moving, the better.
  2. Negotiate terms and make your decision. Once you nail down the options, it’s up to you to decide whether or not a deal is the right move. Hopefully you can work with your acquirer and your investor base to find a good outcome for everyone involved.

If your startup is one of the many with cash in the bank but without a clear path to a next financing round, don’t panic. Now could be the chance to reimagine your best case scenario—invest your cash to find a new home for your company.

https://twitter.com/spencerrascoff
https://www.linkedin.com/in/spencerrascoff/
admin@dot.la
Sol de Janerio founder Heela Yang
Image courtesy of Heela Yang

On this episode of the Behind Her Empire podcast, Heela Yang, the co-founder and CEO of Sol de Janeiro, talks about how uprooting her life to move to another country helped inspire her award-winning body care line.

Read moreShow less
Yasmin Nouri

Yasmin is the host of the "Behind Her Empire" podcast, focused on highlighting self-made women leaders and entrepreneurs and how they tackle their career, money, family and life.

Each episode covers their unique hero's journey and what it really takes to build an empire with key lessons learned along the way. The goal of the series is to empower you to see what's possible & inspire you to create financial freedom in your own life.

HopSkipDrive
HopSkipDrive

Exactly one year after laying off 60 people due to the pandemic, youth transportation startup HopSkipDrive announced today that it's raised $25 million in new funding, its largest round to date.

Read moreShow less
Harri Weber

Harri is dot.LA's senior finance reporter. She previously worked for Gizmodo, Fast Company, VentureBeat and Flipboard. Find her on Twitter and send tips on L.A. startups and venture capital to harrison@dot.la.

RELATEDTRENDING
LA TECH JOBS
interchangeLA