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Max Schireson  |  December 16, 2022
Which Way Is Up: The End of Free Money, and the Importance of Not Running Out of It

It’s always hard to run a startup, but at least in 2021 you knew what you were supposed to do: grow fast.

Now, it’s not so simple.

At your board meeting you have one investor complaining that you aren’t growing fast enough, another complaining that your burn ratio is too high, and another warning you to extend your cash runway. You know you can’t please everyone all the time, but it would be nice to feel like you can please someone sometimes!

Ultimately, it’s not your job to please anyone. You have to choose the right path for your company in turbulent times. In the end, what matters is building a great company – and, right now, a lot of that depends, quite simply, on not running out of money. Here are my thoughts on how to think through this issue, based on my experience as a former CEO and current board member and advisor to several technology companies.

Money is no longer “free”, and that changes everything.

When interest rates were near zero, future revenues and profits were nearly as good as current revenues and profits. Capital markets were willing to make massive investments to build what investors believed would be strong profit streams far into the future. The playbook: Pour money into sales and marketing and come a category leader; eventually, as the market recognizes your leadership, revenue will accelerate. Efficiency in the present didn’t matter, because in the future—when the company had scale, stronger brand, more mature product, and a more educated end user—efficiency would increase.

Well, now investors care about the less-distant future. They care about how much money they need to put into your company to get to that future, and when it will arrive. If you can earn 6%+ in investment- grade bonds, speculative earnings 20, 30, 40, and 50 years into the future aren’t nearly as valuable as they were when interest rates were near zero.

You aren’t the only one who is confused and stressed.

If you are a first-time entrepreneur, you’ve never run a company during a downturn before. If you raised money in 2020 or 2021, you don’t know what a tough fundraising environment is like, and the likely contradictory – but strongly worded – advice you are receiving from your investors and advisors is likely adding to your stress and confusion.

Why the contradictory advice? In many cases, your investors are equally confused. Some of them have been through downturns, some haven’t. Some have had operating roles, some haven’t. All of them want to see their investment succeed, and many face pressure from their partners or their firms’ limited partners to deliver good news of a thriving portfolio. For some of them, you are their star company and their hopes and dreams rest in your hands; for others, they have a decacorn IPO in the wings and whether their stake in your company is worth $0 or $50 million won’t really affect their lives or careers.

When they don’t know what to do, or how to get to the outcome everyone wants, they just tell you to do something good. Grow faster, or burn less money, or be more efficient.

Prime directive: don’t run out of cash.

Someone once told me that successful companies each succeed in their own way, but companies all fail the same way: by running out of cash. You could say that running out of cash is a symptom of some deeper problem: poor product market fit, bad timing, poor sales execution, a botched fundraise, the wrong team. But whatever cause lays behind this symptom, the death is equally clear.

There are a lot of things it feels like you “must” do: continue improving the product, grow revenue, etc. But you can’t do any of those things if you are out of money.

They say time is the one thing you can’t buy, but in fact time is the easiest thing to buy at a startup. Buy less of other things, and you will be left with more time. Say you have $10 million in annual revenue, which is static, and $10 million in cash. Your current gross burn is $5 million a quarter, so your net burn is $2.5 million a quarter and you are out of cash in 12 months. In those 12 months, you need to accomplish something that will make it compelling for investors to give you more money. Maybe you can get your revenue to start growing; maybe you can deliver an exciting new version of your product. But whatever it is, you had better do it soon.

If instead you cut expenses to $3.75 million a quarter, your net burn is $1.25 million, and you have two years to make something good happen. You have fewer resources with which to make progress, but more time. Everyone knows that twice the team often doesn’t build software twice as fast; perhaps three-quarters of the team for twice as long is more likely to succeed? Taking things a step further, if you can operate the company on $2.5 million in gross burn, you are break even and you have all the time you need to figure out how to get the company growing.

Of course, this is an oversimplification, and cutting too deeply can imperil the retention of existing customers as well as your competitive position. But right now it feels to me that most executives are more wedded to their existing plans than they ought to be, and they should be strongly considering options that buy them time.

Envision a realistic future state, and a glide path to get there.

Anyone who starts a company has to be something of a dreamer. It takes a bit of insanity mixed with ambition, salesmanship, technical acumen, and a whole lot of hard work to get a company off the ground. But an awful lot of what we in the startup world is imagine, describe, and sell our dream to everyone around us to try to make it a reality. I am fortunate enough to have been involved in a few of companies as both an investor and an operator where the company made clear and steady progress towards that dream most of the time.

But that is the exception. At most companies, the dream shimmers and dances in the distance, sometimes getting closer and sometimes nearly out of sight, sometimes moving left and sometimes moving right, before (hopefully) coming into clearer focus and eventually being realized.

In tough times, we can’t try to just pounce on the dream and grab it, or we will fail in the way all companies fail – we will run out of money along the way. We imagine our company with billions in annual revenue, or at least doubling every year on its way to billions in annual revenue. But if our sales efficiency is poor, the number of reps we need to double revenue is too high, and we can’t afford it; even if we achieved the growth we are aiming for quickly, our efficiency would be too poor to raise in this environment. We can floor the accelerator in pursuit of our dreams, but we might drive the company straight off a cliff.

In many cases, it is far wiser to be realistic, and acknowledge that the company we have today isn’t ready to grow at that pace. We can then do two things in parallel:

1. Build a plan to grow at what is a realistic grow rate, with a realistic amount of operational leverage, that eventually gets to break even.
2. Make the changes to the company – usually the product – that will enable the company to sell more efficiently.

If those changes are successful, then we can afford to add resources to grow faster. The dream is still out there, but we have to do some work before we can grab it directly. Meanwhile, if our product instincts – on which the company is often built, and will succeed or fail – don’t pan out, we still have a sustainable company with some value, and we can regroup.

Think about a company that’s doing $40 million in revenue and adding $10 million in revenue per year at 75% gross margins. It has $60 million in opex, so it is burning $30 million dollars a year. What does break even look like? Maybe $80 million in revenue with the same $60 million in opex and 75% gross margins? Or maybe $60 million in revenue, $48 million in opex, and 80% gross margins.

Say it’s the second: You cut opex to $40 million now, and ramp gross margin over two years while continuing to add $10 million a year in revenue. This year you burn $10 million, next year about $5 million and achieve breakeven in year three, burning $15 million along the way. Another scenario: You freeze opex, don’t improve gross margins, and aim for the second target. You now burn $30 million this year, then $22.5 million next year, eventually burning $75 million to achieve breakeven four years into the future. It might be easier operationally, but you may not have the luxury of $75 million to get there.

Thinking through these types of scenarios is critical when markets are difficult.

I don’t have a silver bullet; there is no one right answer for every company in tough times, but I hope these approaches to thinking through your challenges are helpful.

The information contained herein is based solely on the opinions of Max Schireson and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.

This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.

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