What to do if your startup is running out of cash

https://marker.medium.com/how-to-manage-a-business-thats-running-out-of-cash-a9e109a2f254

by davesuperman • 6 years ago

77 73 6 years ago

marker.medium.com

justlexi93• 6 years ago

Having a poor cash flow can signal the impending death of a company, and not preparing how to deal with it means certain failure.

coralreef• 6 years ago

The nature of startups (pursuit of rapid growth) is prioritizing product-market fit, not necessarily cashflow.

Most startups die from failing to gain users, not necessarily because they planned expenditures poorly.

dillonmckay• 6 years ago

They fail by pursuing marketshare instead of profitability.

hef198982• 6 years ago

If the users aren't paying enough, they still fail. If they don't have a positive cash flow, they still fail.

Which reminds me of an interview with a German logistics start-up recently. They are funded by 100 million €, a lot of cash for what is basically a simple forwarder. When the co-founder said, that they don't see any risk for them, because their run-way is somewhere between 12 and 18 months I was shocked They have customers, they charge a margin for every transport. Yet they seem not to be cash positive. And their burn rate is at the very least somewhere around 2 million per months.

Coming from that industry, I have no idea how that is even remotely possible. If the crisis would have hit 6 months later, their situation would have been a lot different. And that during a period where everyone is scrambling to keep transportation and logistics running.

rvz• 6 years ago

You need to re-evaluate the sustainability of your tech startup if it has a very high burn-rate, too much head count and little to no revenue but relying on endless VC funding rounds. If the burn rate is in the millions per month, then the forecast doesn't look good there.

As I said before, when it comes to creating a tech startup in 2020, it now has to compete against the risk of being sherlocked or copied by the big tech companies, scalable to millions and generates a high profit margin whilst also being recession-proof, office or government ordered shutdown proof and now you can add pandemic-proof to the list.

Maybe the lesson to learn here can be what Paul Graham one said: 'You need three things to create a successful startup: to start with good people, to make something customers actually want, and to spend as little money as possible.' All points are still relevant but now at this time, it is for startups to make something customers and businesses actually need not 'want' anymore whilst still being able to break even despite the aforementioned obstacles.

qwerty456127• 6 years ago

If the burn rate is in the millions per month, then the forecast doesn't look good there.

How do you even get there, i.e. convince anybody to invest millions without having a well-engineered business model?

echelon• 6 years ago

risk of being sherlocked or copied by the big tech companies

How the hell do you escape this? I'm terrified of my startup getting cloned and staffed with resources beyond my capability of matching.

koolba• 6 years ago

Just ignore it. If your product is good enough and the market is big enough, you’ll be fine. If neither is true, you would have failed anyway.

tialaramex• 6 years ago

The founders and my immediate boss at the first startup I worked for were convinced huge corporations would see what they were doing and just beat them to the punch. Only years later after one of the huge corporations bought the business and they could see it from the inside did they understand that was never possible. At the startup you'd set three people working on something important and get it done the same day, at the huge corp there'd have to be a week or so of meetings to even assign people. Sure you could assign thirty or even three hundred if you needed them, but you're already a week late.

So don't worry about it.

luckylion2• 6 years ago

If you're selling tech: they'll often rather buy you than spend time solving the problem themselves. Most things can't be sped up by a linear factor if you apply more money/people/resources, so they'd still need some time to catch up to what you do. Granted, they'd need less time, because they could do development, marketing, infrastructure etc in parallel, but still: they'll usually prefer not wasting that time and acquihire you (and your team), to go to where you are in a very short time and have domain experts on the team immediately.

That changes if there's a lot of competition of course, they might buy your competitor and throw their weight behind them.

andygcook• 6 years ago

I went through a near-failure experience with my startup at the end of 2017 and wrote about how we just barely got out of it. Sharing in case it helps someone given the current climate [1]

The advice in this article is pretty good. Pinning hopes on the next funding round or putting half measures in place like a 10% layoff when you really need a 50% layoff isn't a sound strategy. My main takeaway from my own experience is that I should have made the hard calls much sooner. 100% transparency with the existing team is also important. If they don't understand why a tough decision is being made, they're less likely to stick around.

-- https://tettra.com/blog/navigating-the-depths-of-near-failur...

xwdv2• 6 years ago

If your startup is running out of cash, accept that it’s game over and prepare for the end. Don’t worry, this won’t hurt a bit.

Otherwise you risk becoming a zombie startup, that is dead but doesn’t even know it’s dead, and that’s a waste of time for everyone involved.

ykevinator• 6 years ago

Zombie is perfect, this is so true

hodgesrm2• 6 years ago

Your advice is way too binary. Cash flow crunches happen all the time in bootstrapped startups. First thing is to cut costs because you can do that quickly.

1.) Cut/defer all discretionary costs.

2.) Founder salaries go to zero. They signed up for it.

3.) Defer sales commissions, e.g., don't pay until the company gets paid.

4.) Defer payments to vendors. If it's 15 days net pay in 60. Our customers do this all the time.

5.) Last of all lay off staff. If you can avoid this step it makes your bounce-back way faster.

Do all of this before you need to.

At the same time go after your marketing strategy. Downturns like what we are seeing now also represent opportunities for companies that can reposition to save users costs. Payoff for this will be longer term.

Finally...It's a bit late to point this out, but it's dumb not to setup a credit line when times are good so you can get through cash flow crunches. I would shoot for something that gives you 6 months runway if you can get it.

zeckalpha2• 6 years ago

4.) Defer payments to vendors. If it's 15 days net pay in 60. Our customers do this all the time.

Not good advice if you think the crunch may last more than 60 days.

xwdv2• 6 years ago

My man, a lot of these things are symptoms of zombie startups. Maybe once in a while a legit business has to do these things to survive, but most of the time the businesses doing these things are zombies. They’ll never succeed, but they will also never “fail”.

jborden13• 6 years ago

No. You can always raise more cash or dig your way out. Yes your odds of success lower as your runway dwindles, but it's definitely not game over. I sold my company two years after running out of cash.

You can become a zombie startup, but that's usually a function of poor leadership.

DoreenMichele4• 6 years ago

It’s a huge struggle to stay motivated during a crisis, especially when your co-workers are leaving. And this goes for founders, too.

Some show on HGTV about crazy houses interviewed a guy with a crazy big house. He had stuff in his house like a private shooting range.

He said he had flown more than a hundred missions while in the Air Force and been shot at in all of them. He figured commercial real estate would be easier to deal with than that and he ended up making a killing, probably because he had nerves of steel compared to most people.

Right now is not a good time to do something like volunteer in a homeless shelter to get perspective, but you can read up on the problems of people who have it worse than you. Everyone is in a world of hurt right now.

Everyone.

Even rich and established people are scared and trying to sell off assets to cover cash flow needs.

Your burden isn't particularly bigger than that of anyone else during this crisis. If you don't show up and rise to the occasion, tomorrow is worse.

Humanity has survived other big crises, like World War II. This isn't the first time and it probably won't be the last.

I'm trying to be helpful. Recent years were much tougher for me than this is proving to be. I spent several years homeless, etc.

(insert encouraging words or grim humor here, whichever is your cup of tea)

Legogris2• 6 years ago

Right now is not a good time to do something like volunteer in a homeless shelter to get perspective,

Maybe it's the right time because the need is certainly there. Not everything has to be done by egotistic motives.

DoreenMichele4• 6 years ago

Yes, the need is tremendous:

https://streetlifesolutions.blogspot.com/2020/03/covid-19-an...

But I'm not interested in being accused of promoting dangerous behavior. I already get enough ridiculous pushback.

lonelappde3• 6 years ago

Even rich and established people are scared and trying to sell off assets to cover cash flow

Having less vastly excess wealrg than before? That's a massive stretch for "world of hurt".

DoreenMichele4• 6 years ago

If you take someone who weighs 300 pounds and chop them in half to get them down to 150 pounds, you probably have killed them.

Millionaires and billionaires don't live in mansions because they are greedy pigs. They do so because they need security. You can't just go move into a local apartment building and live like a normal person. (Also: If everyone is downsizing, who do you sell your mansion to?)

Even with security, Kim Kardashian was held at gun point in her own apartment at one point.

In the news recently was the fact that a barrel of oil was selling for less than the price of an actual barrel. Oil wealth has been a big thing for a long time now. We may see quite a few people utterly ruined.

When the stock market crashed in 1929, some people who had just been wiped out in a single day elected to jump out the window rather than face the future.

bionhoward• 6 years ago

Sell more, is obvious advice here. My problem is I’m a solo founder so I wear all the hats, and I love to code and research and architect. I don’t “love” to pitch, and convince people I’m legit and show them how I can help them. Pretty confident I’m not alone in that. We geeks must sell.

Startups running out of cash right now can cut costs, yes, but the only path to long term survival is to sell enough to cover your costs. For that you need a list and a pitch / script (or a SaaS platform funnel)

It’s a turbulent time. There is almost someone out there struggling who would pay for what you’re selling, but not the way you sold it before this crisis. If not, there’s almost surely someone out there who can use a different application of your skills.

And you know what? Business isn’t the end of the world. A living human can rebuild a dead business. A living business can’t rebuild a dead human (unless Peter Thiel became a necromancer recently)

scarface74• 6 years ago

The obvious observation is that if you don’t want to deal with pesky things like customer acquisition, you don’t want to be an entrepreneur.

1234_yyyfyf• 6 years ago

Nonsense.

I made a healthy 6-figures pa in the Mac App Store with zero marketing for 3-4 years when I first got into software. That was about timing and getting a few products right.

Plenty of stories like that. Just like there are plenty of stories where companies, say, had everything locked down but engineering and failed.

I've never met a successful entrepreneur who spoke in absolutes. To a person they've all admitted there's a lot of luck / timing / chaos involved.

I've met failed entrepreneurs with degrees and funding and plans -- people who on paper did everything right.

hef198982• 6 years ago

Sell more.

This is so obvious, that is easy to miss.

To share my story (which contains a lot of luck, so, or rather good "timing"). I started my small logistics / supply chain start-up last October, theplan was to have first, meaningful discussions about prices and contracts in June / July and have first revenue in August / September.

Pretty privileged to be ablt to afford almost a year without revenue, right? My targeted market was solar modules from China / Asia to Europe and eCommerce fulfillment logistics.

Now, with logistics in place (software not so much), covering th whole chain from China to consumers in Europe I am talking to organisations in germany to help them et supplies from Asia to hospitals and so on. I am basically selling three months earlier than planned. And i realized that my enxiety about reaching out to customers and try selling my services is all but gone after a couple of days.

So: Sell more. Get revenue.

And don't be greedy. The whole idea of getting into medical supplies (I am not going to charge more than my own minimum salary and actual costs) comes from an inquery to run logistics for a business importing hand sanitzer to be sold through Ebay and Amazon. Show some business ethics. Nobody expects companies to turn into charities, but at the very least don't charge more for customers during crisis because of the crisis than you would have otherwise. Should be great for a long-term relationship.

collyw• 6 years ago

Aren't some unicorns like Uber still running on venture capital?

digitaltrees2• 6 years ago

Figure out break even. Cut costs until you’re there. Do it quickly and decisively and take the absolute best care of your team you can under the circumstances.

taneq• 6 years ago

Yes to break-even (this is the whole goal of 'ramen profitability') but also don't neglect finding new revenue sources. And that doesn't just mean 'hustle harder' - maybe you can find a side market, or do some consulting on the side, or something.

digitaltrees2• 6 years ago

At a time like this, spinning up new revenue is a luxury that time does not afford. Get to a sustainable burn rate then grow from a new foundation.

seizethecheese• 6 years ago

What about if you have plenty of cash? How to protect company against monetary uncertainty? Inflation adjusted t-bills?

nurettin5• 6 years ago

Morbid articles about firing people when you're running out of cash are great. Reminds me not to work with people who don't have the personal integrity to take some responsibility instead of acting like a jerk on the first sign of trouble.

stickfigure4• 6 years ago

What is your proposed alternative? What does "take some responsibility" mean when you're staring at the end of the runway?

nurettin5• 6 years ago

Have some personal wealth to spend on wages for a few more months instead of "sadly letting people go". Because you are not sad, not on a runway and what you are riding was definitely not a plane.

accountuser• 6 years ago

On a personal note, a neighbor working for a food services company, serving FAANG size companies was converted from a full time to contractor, and then furloughed.

By his own admission, his employer didn't have enough cash for for other alternatives. There are sometimes no easy ways to deal with running out of cash, especially during a crisis such as this.

In industries reliant on just in time delivery, including that of cash, back inventory and cash piles are non existent. This crisis should be a reason to explore contingencies for such companies/industries

Edit: from another trending HN article [1]: "companies need buffers to face uncertainty –not debt (an inverse buffer), but buffers."

[1] https://medium.com/incerto/corporate-socialism-the-governmen...

cryptica3• 6 years ago

I'm director at a tech startup in the real estate space. We have about 8 contributors working full time or part time and everyone (directors included) is only getting paid with our own blockchain cryptocurrency. We haven't launched yet and have been running that way for months.

You don't need fiat money to run a company anymore. You can make your own cryptocurrency and it works as both money and company shares. I was quite surprised initially by how willing people were to accept it as payment for their work but now it seems totally normal.

luckylion2• 6 years ago

You don't need fiat money to run a company anymore.

You'll need "contributors" with plenty of fiat money then (or real jobs on the side), unless their land lord and grocery store etc take your token as payment.

cryptica3• 6 years ago

This is definitely the case, but even if they spend less time on our project than their 'real job', our project is still getting much more out of them than their 'real employers' in terms of value produced.

Also, in our case, the token is more like a share of the company than a currency. Just because you can't use Google shares to pay for groceries doesn't mean that they don't have value. We have a plan in place to continuously buy tokens back on the market using the future profits we make.

Luuseens• 6 years ago

So your solution is to not pay employees. I'll admit, I'm a bit jealous you found people willing to work for free.

cryptica3• 6 years ago

But it's not worse than how co-founders operate in bootstrapped startups. Initially, they're not getting paid.

The difference in this case is that there is a lot more fluidity in terms of who can benefit from and participate in the project's growth. Also, claims of ownership are backed by a cryptographically-secure financial instrument instead of promises and paper contracts. We know what happens to employees who work for options contracts - In our case, at least their earnings are not going to 'expire worthless'. All directors hold the same type of tokens as employees so there is a shared incentive.

This week we had hundreds of people coming out of nowhere and offering to help us with our marketing in return for a small amount of token.

Seeing this, I have no doubt that cryptocurrency will be the future of startup financing.

jwr2• 6 years ago

"To read the story, create a free account" — no, thank you.

If you want your stories to be read, do not post them on Medium.

jan_g• 6 years ago

I also don't have an account, so I got the same message as you. I wonder how Medium decides which stories are fenced with "create an account" page and which not, because most of the stories I can read normally.

capableweb2• 6 years ago

They have dark UX patterns that makes the content creators mark a setting for doing this. Most of them are not aware it introduces an account-wall for their articles.

LoveMortuus• 6 years ago

Maybe, a smart move would be to have a system that would look at how much traffic certain story has and then depending on the flow of traffic the 'create an account' wall turns on. Although, I doubt they have such a system, but it would make certain things easier.

capableweb2• 6 years ago

I advise everyone to flag this submission as it's not really readable by most people, because of the account-wall.

jwr2• 6 years ago

I would really like HN to institute a policy that only publicly-accessible articles are valid submissions. I am tired of seeing links to dozens of stories in newspapers/journals that I can't read. I am all for paying for content, but I can't be expected to subscribe to all of these newspapers/journals. Paid content is fine, but it is not part of the open web, so should not profit from HN traffic.

HN should be a link site to the open web.

huxflux• 6 years ago

"To keep reading this story, create a free account." - No.

shartshooter• 6 years ago

I run two companies, one is a passive income SaaS business and the other is a CRM consulting business.

Inbound inquiries into the SaaS business have dropped off. That business helps drive sales but traffic is basically gone because businesses aren’t looking to buy another $1k/mo tool.

My CRM consulting company has had some drop off where customers are putting projects on pause. That said, we still have deal flow, companies are looking to operate during this time of crisis, although we are looking harder to find them.

I’m fortunate because both companies have almost no overhead(contractors + 100% remote) which helps quite a bit.

Companies with a lot of overhead are going to be in a world of hurt relative to those who were already lean or who can pivot quickly.

fraktl• 6 years ago

Clickbait title during hard times and then account-wall.

Can it scream "do not read, there's nothing useful here" any louder?

neonate• 6 years ago

https://archive.md/PMIw2

What to do if your startup is running out of cash

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