With the scarcity of investments, taking care of the cash is essential for startups

A year ago, startup founders often found themselves hot on the heels of venture capitalists eager to grab a piece of any promising young company with rapid growth potential. Investors competed in an increasingly heated environment in which they were often pressured to close huge deals in a matter of days. In all, venture capitalists spent a record $643 billion in 2021, nearly double what they had the year before.

But times are changing. Global venture investing in the first quarter of 2022 was down 13% from the previous quarter, marking the first time in a year of record funding when initial capital investment fell from quarter to quarter.

Rising inflation, a crippled IPO market and continued instability brought on by Russia’s war in Ukraine have injected new caution into investing in startups. As a result — with the next venture capital check suddenly not as sure as it might have been a few months ago — investors and others in the industry say startup leaders should consider cutting back on spending and saving money.

A number of Capital Venture firms are evaluating portfolio companies on a range of metrics to ensure their cash burn is where it should be.

Cash burn essentially refers to the rate at which a startup is spending its venture capital. The issue is especially important for risk-backed startups and especially when the fundraising environment is dubious. This is because startups are often not yet profitable: any revenue they generate is typically reinvested into the business in an attempt to scale as quickly as possible.

Startups should make sure their R&D and administrative expenses are in line with the market. They must also ensure that sales and marketing teams are meeting their quotas and building a pipeline.

Cash is king now, we are in a time when it is a little more complicated to raise money and you must have at least 18 to 24 months of guaranteed cash to get through this most turbulent phase.

putting out the fire

Startups can stretch their cash by reducing hires, cutting out big expenses like real estate and, in rarer cases, laying off employees.

While we have yet to see widespread bloodshed in the industry, several prominent startups have laid off employees en masse this year.

But despite some prominent examples of cost cuts, investors say they are advising their startups to stay the course and be mindful of cash spending, while still looking for solid growth.

this time is different

Some startups are still posting strong growth numbers despite the slowdown in the venture capital market. You can still see late-stage companies with solid fundamentals that are growing 2x to 3x.

saving money

The main ways companies control cash burn is by managing fixed costs.

Fixed costs will eat up all your business funding if you’re not careful, especially in a high interest rate environment.

Employee growth is one of the easiest ways to manage fixed costs, so we will likely see startups pull back on hiring. When hiring, many may choose to carefully screen candidates who are more expensive but can contribute to the company in the long run.

Compensation packages can also lean more towards equity than money.

Many startups will benefit during the current “tightening period” from the cost-cutting they made when the pandemic hit. In 2020, companies quickly moved to remote workplaces, reducing fixed costs for office space and travel.

Some of these fixed costs are unlikely to return to pre-pandemic levels, he added.