Vaibhav Sharma
Vaibhav Sharma
Strategic Finance & Capital Markets
Posted on
September 30, 2022
·
0
min read

How we've been thinking about managing runway at Capchase

How we've been thinking about managing runway at Capchase

Managing cash burn and extending runway has been on every startup founder, CEO, and CFO’s mind over these last few months. In just a short period of time, we’ve seen public software company valuation multiples contract approximately 60% on average and more than 80% in some sectors.

At Capchase, we are hyper-focused on not only extending our own burn and runway but also helping SaaS startups and founders like ourselves extend their runway to avoid raising equity in this down market. We are advising our clients to aim for 2+ years of runway if possible, and the key question for many founders is: how? What should founders be doing today to manage liquidity, extend runway, and emerge at the top of their respective markets?

How Capchase is extending its runway and managing burn - and how you can, too:

Focus on risk, not just return.

Growth is a key component of any startup, and is the reason startups receive outsized equity valuations at fairly early stages. Startups founded in the last economic boom since the early 2010s, have been able to focus on this growth without thinking much about the risk of losing customers, as cheap capital was fairly attainable and consumer sentiment was high. However, times have changed and startups can no longer ignore risk.

At Capchase, managing risk is one of the most important focus areas of our business. We have renewed our focus on refining our underwriting algorithms and refreshing the methodology behind CapScore, our proprietary system that evaluates hundreds of data points (such as subscription rates, growth, cash on hand, etc.) and determines in near real-time a company's ability to repay a loan, both now and in the future.

In today’s environment, digging deep into how you can avoid outsized risk or conducting an analysis on customer lifecycle and underlying risks will be just as important to your company as top-line revenue growth.

Better understand your working capital requirements and areas for optimization.

There are many ways to extend and preserve runway without turning to external capital injections. Firstly, finance teams should conduct in-depth analyses to understand where they should be investing capital or pulling back on spend for the greatest contribution margin growth.  Perform scenario planning early and often to stay in control: we recommend founders should switch from occasional financial planning to monthly recalibration, at a minimum. This has brought great results for our team and allowed us to ‘pivot’ quickly as needed.

And don’t just evolve your planning in terms of frequency: if it doesn’t already, make sure your capital planning and forecasting process includes hand-in-hand work with each of your business units. This company-wide coordination is critical to align the business on company-wide goals and spot problems and optimization areas earlier on.

Some areas we have focused on for runway preservation include:

  • Cash Cycle Improvement: Advance receivables and delay payables to the extent possible. Sell more of your short-cycle products to generate cash or upsell current customers. The goal is to get to shorter sales cycles, faster.
  • Cost Containment: Stay close to all your expenses, ensuring customer acquisition costs are streamlined, vendors are truly necessary, and exploring opportunities for tightening across the board.
  • Product & Engineering: Prioritizing and phasing  engineering and product resources is vital. Executing on hiring all at once could lead to faster growth but may require you to raise earlier
  • People: Hiring often leads to more hiring. Push business unit leaders to understand what the true need for an incremental hire is - you may be surprised to see how much lower your hiring plan could be if you tie each hire to critical initiatives.

Invest in accretive value creation.

At Capchase, we made sure we updated our shared understanding of growth and value creation, with a renewed focus on our unit economics. Our recommendation? Look at your unit economics and make sure that every $1 of customer acquisition spend is generating >$2 in contribution margin.

The idea now is not to discard growth, but to do so responsibly through effective customer acquisition, making sure you do not grow with a ‘leaky bucket’.

We also revisited our approach to new products as a team. With a renewed focus on runway, when should we launch MVP pilots instead of full products, and so on? Our conclusions were to focus on products you can launch with quick upsell and uptake from existing customers, as opposed to products you’ll have to sell from scratch to an entirely new customer base.

Balanced against this, it is also important to maintain the integrity of your customer focus: how can you continue to add value to your customers? This will inherently better your own metrics and valuations.

Amplify any cash on the balance sheet with non-dilutive financing

Now is the time to invest in growth with alternative finance. Use revenue-based financing options to draw funding for a rainy day. You can invest this extra capital in quick payback customer acquisition to generate quicker growth (which you’ll need to balance out the customer crunch of the downturn), or to manage typical working capital cycles.

So, in total, we have explored - and can recommend - many ways to extend your runway. Start with what you can optimize internally. But when it comes to extending your runway with external support, consider revenue-based financing over traditional venture capital. The last thing you want to do in the current environment is try to raise an emergency round of equity funding at contracted valuation levels.

But if you have to do it, we recommend you consider raising an insider extension to your last series round. Existing investors will be more willing to invest to simultaneously extend runway and lower their cost basis, but likely at a more reasonable discount versus outsiders.

Finally, continue working on upping your valuation and boost your company’s morale - the market uncertainty will pass at some point. You will, hopefully, emerge on the other side with a healthy runway, motivated workforce and a track record of responsible growth.

Maintain independence and raise money your way
Get financed