10/08/2020

Cash is King: How to Survive and Thrive in Cash Crunch Times & Beyond

There’s an unspoken belief in most venture capital circles that successful entrepreneurs should be so consumed with ambition to “conquer the world” that pragmatism is a sign of weakness.

In part thanks to the COVID-19 pandemic and evolving “new normal,” this misconception may finally be starting to crumble.

The truth is, all founders have ambition—they just have different appetites for risk and varying definitions of success. Where Founder A may raise $10 million to get to $4 million in revenue in short order, Founder B would rather raise $2 million, stay lean, and get to that same $4 million over a longer period of time with less dilution.

Take GitHub, the now household name in software development. In 2008, the three GitHub co-founders opted to start small and fund early growth through sales instead of raising external capital. They also decided to work remotely and convene in coffee shops when needed instead of splurging for expensive office space. Four years later they had achieved meaningful scale and landed a $100M investment from a16z on their way to an acquisition by Microsoft for $7.5B.

We saw a similarly pragmatic growth story for portfolio company Relatient, a patient engagement platform for healthcare providers. Relatient had largely bootstrapped its way to meaningful scale, and we invested in 2017 to accelerate growth. We anticipated an exit process would happen about four years after our investment. While the business continued to operate capital efficiently during our hold period, our newly installed CEO helped accelerate growth in bookings and revenue. With these improved metrics, we received an inbound offer just two and a half years into our hold period and ultimately sold the business for a premium valuation.

Both of these examples provide proof there is more than one way to scale.

The case for pragmatic growth

We believe in capital efficiency and sustainable growth, even in the best of times. But as the global economy reels from the pandemic, it behooves every founder to make a shift towards the pragmatic. Oxford professor of business and public policy Karthik Raman recently called this: “prudent accounting principles … and managerial states of mind.” It might not grab headlines, but it’s a recipe for sustained success.

Luckily, B2B software companies have proved to be more resilient to the pandemic than industries such as retail and hospitality. But Pitchbook’s Q2 analysis finds that an outsized percentage of investment dollars have gone to late-stage financings and mega-deals, while first-time financing for startups has dropped to a multi-year low.

In other words, unless you’re already at the top of the food chain, you’ll need to stay nimble and resilient for the foreseeable future.

To that end, here are some ideas on how to practice good cash hygiene both during (and after) a crisis.

Relinquish your lease(s)

The pandemic has accelerated the mass adoption of remote work and the end of an era when companies needed fancy office spaces to attract and retain top talent. A recent New York Times survey found that for white-collar workers for whom working remotely is an option, 86 percent said they are satisfied with working remotely and 60 percent said they felt healthier and more connected to their families.

Here in Austin, coworking space Capital Factory has already said it may never return to offering full-scale desks and offices, instead focusing on conference rooms where groups of remote workers can gather as needed.

Not ready to fully ditch the office? Use the current market conditions to your advantage. Explore the growing supply of sublease office space coming to market or negotiate further perks and concessions with your landlord, as Inc. recommends here.

Hire a finance superstar (if you haven’t already)

In the early stages, CEOs can be tempted to completely outsource accounting and finance, which almost ensures that it will be more of a “check the box” function than a key strategic role. While this post should provide some good food for thought and a starting place for improving your cash flow, a seasoned finance pro can help your company make smart decisions about what to invest in, when, and how.

While you may not be ready for a CFO or even a VP of finance, an in-house finance professional with the ability to surface critical insights will be a crucial hire as you steer the company through the pandemic and beyond. (Hint: Look for someone who has experience managing finances for a capital-efficient technology company.)

Founders across our portfolio commonly admit that they wish they had hired a bonafide in-house financial resource well before kicking off the fundraising process.

Accelerate accounts receivable & extend payables

Ensure steady cash flow by trimming any fat from your invoicing processes. Make sure your accounting team issues invoices promptly. Then consider incentivizing early payment with customer discounts (typically 2-5 percent for payments received within 10-15 days).

While working to bring payments in quickly, keep as much cash as possible on hand. Work with your suppliers and vendors to negotiate better terms on your agreements and extend payables to net 60 or more where possible.

Know the rule of 40

The Rule of 40 posits that a scaling business’s revenue growth rate plus its profitability margin should be equal to or more than 40%. Many venture-backed businesses sacrifice profitability for revenue growth, and this “Rule” is a way of encouraging balance in service of sustainability. (You can read more about it here.)

Ian Bresnahan, CEO of Itential, is a thought leader in integrated software-based networking and a classic example of a pragmatic yet ambitious entrepreneur. Bresnahan had achieved millions in revenue without any outside capital, but realized that growing requests from customers demanded additional capital and expertise.

Shortly after we invested and provided operational support to scale the company, he was able to close out the fiscal year with accelerated revenue growth, both meeting and exceeding the Rule of 40.

Adopt a bootstrap mindset

As Alex Lazarow, author of Out-Innovate: How Global Entrepreneurs from Delhi to Detroit Are Rewriting the Rules of Silicon Valley, astutely points out, startups operating outside of major VC and talent hubs learn to be capital efficient by necessity—since talent and capital are already scarce and economic shocks occur more frequently outside bubbles like Palo Alto and London.

Today’s global economic crisis means that every company, no matter where it's headquartered, can learn from entrepreneurs outside tech hubs with resilient business models who take a long-term approach to growth and profitability.

In other words, adopt a bootstrap mindset, which Bresnahan sums up succinctly: “When it’s your own money, you treat it like it’s your own money.”

Taking a cue from outliers and bootstrapping pragmatists will serve you well in a crisis—no matter where the money comes from.