Think back to the last time you sat in an aeroplane as it turned the final corner to line up on the runway, and how quickly the long stretch of tarmac was eaten up by the rocketing acceleration of the plane.
Now imagine the runway has been reduced by half. The task of getting that 200-ton metal vehicle off the ground and soaring through the air is suddenly far more challenging.
This is the reality for startups with short cash runways.
It’s been predicted that the average UK tech startup has just four to six months of cash runway. Coupled with the fact that VC investment levels saw a decline in 2022, tech startups are facing a cash cliff edge.
But there’s a light at the end of the tunnel. By learning from the mistakes of others, and maintaining focus on driving profitability, tech firms can achieve sustainable growth in times of adversity.
Learn from those around you
A major economic downturn can trigger pendulum swings within businesses – big decisions must be made to keep heads above water. At the end of the day, you need to do whatever is reasonably possible to keep the doors open.
This is where startups can learn from others’ past mistakes.
For example, tech giants such as Twitter are making huge cuts to their workforce, proving that strategies that have worked in the past may need addressing. Tech startups are surrounded by valuable lessons that could be instrumental in ensuring steady growth throughout challenging times. Keeping an eye on the market has never been so important.
A wealth of opportunity
Even in times of adversity, there are certain things that our digital society requires to function; technology and software being two core examples. 99% of businesses worldwide use at least one software-as-a-service product.
Therefore, there remains a whole host of opportunities for tech startups to provide solutions to the problems many businesses face. By delivering innovation that helps organisations to overcome the unique challenges presented during times of economic hardship, startups put themselves in a strong position to maintain customer loyalty, as they’ve already been put to the ultimate test.
There’s no time or budget for ‘nice to haves’, so firms need to be committed to solving a specific problem or need, and make the value of the product abundantly clear.
To do this, startups must assess why their customers and prospects need them and the product or service that they provide. Every company is striving to reach a reality where it will cost your prospective customers more to not use your product or service, than it would if they were to engage.
Preparing for take-off
To get a business off the ground with a strong and healthy trajectory, there are certain factors that need to be mapped out beforehand – the cash runway. Some examples include overheads, staffing and delivery costs, and survival time without capital injection.
The cash runway holds importance now more than ever, given that investment levels are at their lowest since 2016. It’s common for tech firms to take years to achieve profitability, and many never do, especially as so many are dependent on big contract wins to attract further investment or even acquisition.
Other challenges arise when a growing pipeline forces startups to scale their workforce to meet incoming demand from investors, customers, and prospects. Unfortunately, this often happens at a much faster rate than the original calculations around growth trajectory, which becomes a major problem in economic downturn. We’ve already witnessed what can happen as a result of growing your workforce at an unsustainable rate, namely through the huge quantities of job cuts being made across the sector. What works as an immediate solution doesn’t necessarily translate the same value in the long term.
Finally then, when startups are lining themselves up at the start of the runway, warming up the engines in the moments before take-off, they should feel confident that everything they’ve done in preparation has set them in good stead for the next few phases. So, even if they’re faced with a short cash runway – as so many are nowadays – they’ve done everything that can be done in the drive to achieve profitability.
Matt Bunn is the co-founder of Scaling Partner.