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Are you worried about having enough cash to make it to your next round of VC funding?
If you are, you’re not alone. It’s easy to overshoot your planned budget as a startup, whether because of aggressive growth initiatives, surprise expenses, or unexpected changes in the market that cause a dip in your revenue. And in the current macroeconomic climate, where VC funding is more difficult to secure than ever, many founders are extra cautious about preserving their cash runway as much as possible.
It doesn’t help that the recommended runway for SaaS startups is pretty challenging to achieve. The traditional suggestion is somewhere between 18 months and 22 months, while we recommend 24 months or more. Either way, this is a lot of capital to have on deck—especially considering that according to a 2020 report, 55% of startups don’t even have 6 months of runway.
Fortunately, there are ways to extend your cash runway between VC equity rounds, and they don’t require applying for a VC extension round. The two primary options you can use are optimizing your existing business operations and seeking out alternative financing.
Keep reading to learn some strategies to accomplish one or both of these goals so you can pad your runway and make it to your next round with plenty of financial cushion.
Option 1: Optimize business operations
One option for extending your runway between VC rounds is optimizing your existing business operations to burn less cash or increase your revenue. Here’s a breakdown of ways to accomplish this, sorted by whether they involve cutting costs or taking in more revenue.
Ways to extend runway by cutting costs
1. Identify and cut out inefficiencies
Although it can be cumbersome, reviewing all the processes and operations across your business and finding things that could be streamlined, eliminated, or condensed can add up to significant cost savings—even if the items you change may seem insignificant on a piece-by-piece basis.
Take a close look at your team’s workflows and identify any inefficiencies or bottlenecks, particularly in areas known to be over-budget and/or underperforming. Look for time-consuming and costly tasks that don't contribute much value, and find ways to automate or simplify them using tools or strategy changes. This process will likely require the input of your department leaders, who have a more detailed perspective on their team’s bottlenecks.
For instance, you could look at your marketing expenses and cut out any low-performing campaigns or channels while doubling down on high-performing channels. Or, if your product team is known to finish projects late due to poor communication, consider investing in project management or workflow automation software.
Anywhere there’s a problem is fair game—the goal is to analyze your processes on a businesswide level and cut the fat wherever you find it. By eliminating these inefficiencies, you can maximize the productivity of your team and resources, leading to lower operating costs and an extended runway.
2. Embrace remote work and outsourcing
Paying, managing, and supporting teams accounts for a significant chunk of every business’s budget. So, if there’s an opportunity to save on people, it’s a good idea to take advantage of it.
According to Forbes, 98% of the workforce would like to work remotely at least some of the time—which means that in addition to helping you save on office costs, using a remote-first model can help you attract top talent. Embracing remote work also allows you to access a global talent pool, often at a lower cost than hiring locally. So, if it makes sense for your business and industry, hiring remote can help your pocket.
Outsourcing is another way you could save on costs. Consider outsourcing non-core functions to specialized service providers or freelancers. Straightforward repetitive tasks that don’t require much training are safest to outsource, such as support for your accounting, HR, or customer support teams.
However, this approach has one caveat: successful remote work and outsourcing require effective communication and collaboration tools. Invest in video conferencing software, project management platforms, and communication channels to connect your team and ensure seamless operations across borders.
3. Renegotiate (or remove) vendor contracts
Is every single one of the subscriptions, tools, and services you’re paying for still necessary for your business? Review your expenses and identify anything that no longer provides value, whether because your needs have changed or because the product underdelivered on its promises. Then, whenever possible, cancel anything you no longer need.
For contracts you still need, seek opportunities to renegotiate for better terms, discounts, or extended payment periods. To identify contracts that could be negotiated, find contracts that aren’t being used to their fullest potential, include unnecessary add-ons, or have recently gone through a pricing or structural change. Contracts that toe the line in terms of fitting your budget could also be good candidates. You could use the fact that you’re considering cutting the contract due to budget constraints as leverage when negotiating.
Ways to extend runway by increasing revenue
1. Diversify your customer base
Expanding your reach into new markets and targeting additional customer segments can be a great way to increase your revenue and overall cash flow. It can also help you diversify your revenue streams and avoid the dangers of depending on a single audience or market for all your revenue.
Start by conducting thorough market research to identify untapped opportunities and niches. Consider customizing your product features, pricing model, or messaging to address the needs of customer groups you haven’t previously targeted.
Then, tailor your product, marketing, and sales processes to cater to these new customer segments' specific needs and preferences, as applicable. Ensure you launch targeted marketing campaigns that speak to each segment’s pain points to capture your new audience’s attention and signal to the market that you’ve diversified.
2. Focus on upselling and cross-selling
Focusing on upselling or cross-selling your existing customers is a great way to raise customer lifetime value (LTV) and overall revenue without raising customer acquisition costs (CAC) too much. In general, selling to customers who have already bought your product before is much easier (and cheaper) than convincing new prospects to buy.
Upselling involves offering customers a higher-tier version of your product or additional features that align with their needs. Cross-selling, on the other hand, introduces customers to complementary products or services that enhance their experience. For instance, a streaming service might cross-sell by offering a discounted bundle that includes both music and video streaming.
To effectively upsell and cross-sell, it’s essential to understand your customers' preferences, behaviors, and pain points so you know what gaps your product and marketing efforts aren’t filling. Build out additional offerings based on these needs, and experiment with different messaging angles that put a new spin on how your product solves existing needs.
3. Introduce new pricing models
Sometimes the biggest obstacle to earning more revenue is simply your pricing. If you’re selling expensive annual contracts that are the same price for all buyers regardless of usage or buyer persona, consider implementing tiered pricing plans, usage-based pricing, or monthly contracts to decrease the upfront cost of your product and incentivize different customer segments to buy.
Tiered pricing plans offer customers different levels of features and benefits at varying price points, which allows you to cater to a broader range of needs. Usage-based pricing charges customers based on their actual usage of your product, which provides extra flexibility and increased value for those who don’t need to use your product constantly. And, of course, monthly contracts simply mean customers pay in monthly rather than yearly installments, which offers a bit more flexibility that can make your product more appealing.
Another way to change how your customer perceives your pricing (without actually changing your pricing) is through B2B BNPL (buy now, pay later). B2B BNPL allows customers to pay for contracts in flexible monthly installments while you get the total contract value upfront.
Option 2: Raise capital with alternative financing
If changing how your business operates to cut costs or increase revenue doesn’t make logistical or financial sense, the second option for extending runway between VC rounds is to seek additional financing.
Occasionally, this can be done with VC extension rounds, which can be difficult to secure and may have an unpredictable effect on your relationship with your investors. That’s why a much more popular option is alternative financing. Here are two of the most common methods for extending startup runway using alternative financing.
Revenue-based financing
Revenue-based financing is an alternative financing method that lends capital based on your recurring revenue. The amount of capital you can draw is based on your ARR and scales as your business grows. Likewise, repayment scales as your business grows, which can ease the financial burden during pivotal growth phases. Typically, repayment is made as a fixed percentage of your MRR.
One of the key advantages of revenue-based financing is that it enables you to extend your startup’s runway without diluting equity or ownership. This means you can get the extra cash you need without giving up control of your company.
Revenue-based financing is also fairly easy to apply and get approved for, with some underwriting processes taking as little as 3 days. The application process typically involves no collateral or credit check and only requires that your company has a track record of bringing in consistent revenue over several months.
If you want to see how much you could extend your runway using revenue-based financing, check out our runway calculator.
Debt financing
Another popular alternative financing method is debt financing. This approach involves securing capital through loans or other forms of borrowed funds.
Debt financing comes in a range of options, including lines of credit, small business loans, venture debt, and other types of loans. For most of these options, the approval process requires some form of collateral, a credit check, and a plan for how you’ll use the funds. Some options, such as venture debt, may need additional information about your business’s growth targets and overall business strategy.
Once you get approved, debt financing is pretty straightforward: you receive your funds and repay in installments with interest. The benefit of this structure is that it’s non-dilutive and allows you to retain ownership over your business. It also doesn’t come with as many strings attached as venture capital.
The downside is that interest rates can be fairly high, and if the repayment plan is too aggressive, you risk falling behind or funneling too much of your cash into keeping up with your loan. If you opt for debt financing, it’s important to pick a lender that understands your business and industry and to only agree to repayment terms you know you can follow through with.
Extend runway for your startup with Capchase
Both optimizing your business operations and seeking out extra funding are effective ways to boost working capital and extend runway between VC rounds. Ideally, both of these methods should be used in combination with each other.
Whether you’re trying to supplement your efforts to cut costs and increase revenue or if you’re trying to raise funds without changing your business operations, Capchase offers non-dilutive alternative financing that can help you inject extra capital into your business.
To learn more about how you can get an offer and access your capital in as little as 72 hours, sign up here or talk to our team.
