Startup founders are facing uncharted economic waters. David Ehrenberg, founder of Early Growth, the largest startup financial services firm in the U.S., shares his checklist for startup financial health through COVID-19, including:
- Reducing Cash Burn
- Reviewing Contracts
- Modeling Revenue
- Venture Outlook
- Non-traditional Funding
Startup founders should keep a close eye on their balance sheet even in the best of times. In a worldwide crisis, however, trimming expenses and extending your runway could be a matter of survival.
David Ehrenberg, founder of financial services firm Early Growth, says that founders should be taking a hard look at these three things to ensure they can weather whatever storms may result from COVID-19:
- their burn rates
- revenue forecasts
- and sources of funding
Ehrenberg, a member of Founders Network since 2013, founded Early Growth in 2008, and it’s since grown into the largest financial services firm in the U.S. catering specifically to early stage startups.“You need to create a company and an organization that is lean enough that it can survive the next two or three years.” - @EarlyGrowthFS Click To Tweet
“That means taking a good look at your staffing and who’s essential, taking a look at your spending and what’s discretionary and what’s non-discretionary. It’s also about taking a look at different initiatives you have going on to see if they make sense or not.”
Aim for two to three years of runway
We may not know how long the current economic downturn may last. But startups should aim for two to three years of runway, Ehrenberg says. And there are many other ways to potentially improve your financial outlook, from reviewing contracts to exploring new sources of funding. Founders should leave no stone unturned.“I think the biggest mistake a company can make right now is to not be acutely aware of the situation that we're in, and adjusting and planning for it appropriately.” - @EarlyGrowthFS Click To Tweet
“I think the biggest mistake a company can make right now is to not be acutely aware of the situation that we’re in, and adjusting and planning for it appropriately,” he says.
Review terms and relationships
Lenders or vendors may be willing to renegotiate contracts, Ehrenberg adds. “Founders should closely review those terms of those relationships and take advantage of opportunities to adjust or delay certain expenses.”
“Take a look at contracts, and see what you can renegotiate and what you can get out. Take a look at any bank loans or debt that you have and renegotiate it,” he says.
Map out your revenue
Now is also a good time, as ever, to map out what your revenue will look like in the coming quarters — and what funding you’ll need to push through stormy economic waters. There are a variety of funding sources available, from government loans and lines of credit to venture funding. Banks and other venture debt providers are also likely to remain active throughout the crisis, according to Ehrenberg.
Startup founders need to look at all of the available options and weigh the pros and cons. Founders should also be aware that the available sources of financing can depend in part on their own business outlook. Venture funding is likely to get more competitive in the current environment, Ehrenberg adds.
“One of the things that’s so hard about this situation is that we don’t have definitive data on anything, when it comes to the medical numbers or the economic numbers,” he says. “We don’t have a lot of data yet, but by the estimates that we’ve seen, there will be a decrease in venture funding of between 30% to 50%. But there’s still going to be funding going on.”
Some startups may thrive in the current environment. You don’t have to look far for examples of tech companies seeing significant growth as people work and spend time at home. Others more tied to economic cycles, or particular industries hard hit by COVID-19, will see a much greater downturn. Options for extending your runway can look different depending on what category you fall into, Ehrenberg says. Revenue-based investments may be a good option for startups with a healthy top line. But the bar may be a bit higher to get new rounds of investment flowing.“People are not going to just be funding based on a pitch deck. They're going to want to see real traction, they're going to want to see revenue, and they're going to want to see customer engagement and proof points.” -… Click To Tweet
Explore a range of options
“People are not going to just be funding based on a pitch deck. They’re going to want to see real traction, they’re going to want to see revenue, and they’re going to want to see customer engagement and proof points,” he says. “People have this idea that venture capitalists are huge risk takers. They’re not at all. They’re incredibly conservative.”
Whatever the path to weathering COVID-19, startup founders should explore a range of options and, of course, remain closely engaged with their board and existing investors to figure out the beat path forward. Founders should be aware that they may have to raise at a lower valuation, too.“This is a good time to think about your business model. You can always restart initiatives, but this is a time to be really conservative and make your dollars last as long as possible.” - @EarlyGrowthFS Click To Tweet
“It is a good time to think about your business model,” Ehrenberg adds. “You can always restart initiatives, right? But this is a time to be really, really conservative and make your dollars last as long as possible.”
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