by Dalton Caldwell1/22/2015
Let’s imagine that you are the founder of a company that has successfully raised an angel or institutional round and are currently in a situation where you have 12 months or less of runway.
The hardest part of dealing with a low runway situation is managing your own psychology. You have to simultaneously manage your own anxiety to not be overly negative about your prospects, but also not be irrationally positive. It’s a delicate balance.
If you are Default Dead then it is your responsibility as a founder to immediately take actions to become Default Alive. The mechanisms by which you can move from Default Dead to Default Alive are straightforward: Either you need to grow revenue more quickly, cut costs, or both.
Founders can get caught in a thought cycle which causes inaction and an inability to fix the situation they are in.
Here are some common counter-productive ideas:
Don’t let these ideas be the justification(s) for why you choose to remain Default Dead.
Understand your leverage in a negotiation
What can we learn from the above graph?
Some tips on reducing burn
If you want to reduce burn, the least painful thing to do is make a lot more money immediately. Hopefully you have been trying to do this anyway.
But what if immediately dramatically increasing revenue to become Default Alive is not possible? You must cut costs.
Real estate/lease costs are binding agreements and very difficult to get out of. Real estate obligations are a common cause of death for later stage companies.
Payroll costs are the most likely source of high burn scenario. As mentioned in The Fatal Pinch, over-hiring is usually the root cause of high burn. If you do choose to reduce staff it is imperative to treat your former employees well. You should also be transparent with your remaining employees. Remember: You should always treat your staff as you would want to be treated.
The easiest things to cut are things like PR and marketing expenses, as well as random incidental spending on perks/parties. Don’t blow your money on this stuff.
The point of no return
So what happens if you have less than three months of cash? It’s important to face the issue head on and account for your liabilities and the scenario of shutting down your company.
In many cases, <2 months is the point of no return. If you are in this state it is immediately necessary to lay off your employees and give them severance, pay down your obligations, and use your remaining cash for shutdown costs. If you don’t do this and instead end up with zero cash and outstanding payroll, tax or other obligations, things will get Very Bad.
Some things to consider at this stage:
Even if things go poorly, behave in a way you would be proud of.
It’s tough to be a founder in a low runway situation. Get support and advice where you can get it. Mentors and advisors can help you navigate through these times. Often the toughest thing for a founder that has made it this far is to “admit defeat.” If you are worried about your reputation, keep reminding yourself that it’s just as important to handle situations well when things go poorly as it is when they are going great.
In closing, if you remember nothing else, remember these two things: 1) don’t lie to yourself and 2) act quickly and decisively.
Dalton is Managing Director, Architect and Group Partner at YC. He was the cofounder and CEO of imeem (acquired by MySpace in 2009), and the cofounder and CEO of App.net.