Funding Strategy & Cash Management

 

Startups fail because they run out of cash. There are lots of articles and books written on the different failure mechanisms for startups, such as the Top 10 Startup Mistakes infographic! However, one of the most important things for a startup board is to manage the cash runway effectively. I have two specific recommendations for this:

(1)    Report cash-out date in every board meeting. If the company is not generating cash, monitor where the cash runs out on the current burn-rate. This is particularly easy for pre-revenue companies and such date should always be top of mind. It’s more complicated for revenue-generating companies, especially if the revenue is risky… I myself and other startup directors have learned the hard way if the riskiness of revenue is underestimated. Therefore, in my revenue-generating companies, I request two dates: (1) cash-out date with expected revenue; (2) cash-out date if all non-committed revenue goes away. These two dates provide the boundary conditions for necessary fundraising. A team needs a solid finance function and a good understanding of the variables / drivers / levers on the finances (both on revenue and cash) to monitor this appropriately.

(2)    Regularly review and update the funding strategy.  A funding strategy consists of the near-term funding needs (next capital raise) and the longer-term picture. When raising a round of capital it’s important to size the round to accomplish key milestones that will facilitate the next round of capital raising. This interplay between the rounds is nicely depicted graphically in the image below. An entrepreneur / CEO who is thoughtful about their funding strategy is one of the most noticeable aspects of a pitch and often reflective of thoughtfulness overall. Of course, a given strategy rarely (if ever) unfolds as planned, creating the need both to have a working hypothesis and to continually review and evolve it.

Please note that the funding strategy is crucially different to the financial review. Especially in early stage startups, the finance function may be outsourced or served primarily by an accountant. This is appropriate for the finance function of the company (accounts, cash-out projections, etc.), but not for the funding strategy. The funding strategy is a board-level topic created and evolved by those of the board with experience in raising venture capital or other finance. A solid startup board has multiple people (often investor directors) who can input and help evolve the funding strategy alongside the CEO, who needs to understand it well to represent the strategy in fundraising presentations. A funding strategy usually incorporates a long-term strategy around shareholder value creation and the different stages and milestones for the company to achieve that progress, and then smaller steps and funding rounds needed along the journey paired with capital sources and investors appropriate for each stage. The image below depicts the stage nature of the funding strategy.