In an article in the Financial Times, venture capital investors warned tech companies to hold more cash. The warning to extend cash runways comes amid worries that the global economy and stock market volatility is threatening to trickle down into private tech financings. But if you’re a high growth, cash-burning tech company, hoarding cash is easier said than done. Especially if you’re a tech company that’s investing all revenue back into your business to fuel growth. In other words, you’re deliberately maximising growth at the expense of profitability.
Be that as it may, even when the economy is strong, it’s a known fact that raising capital is often difficult and time-consuming. Worse still, it diverts the much-needed attention of founders. Of course, there are other reasons why it makes strategic sense to extend your cash runway.
First off, with a cash runway, you can insure yourself against potential pivots, cost overruns and the lumpy revenues associated with seasonal businesses. Beyond that, a cash runway gives you a comfortable lead time for fundraising to help you to reach significant funding milestones, and to scale your business. Not to mention it puts you in a good negotiating position to secure additional funding.
Investors recommend you cushion your business with a cash runway of 18-24 months between funding rounds.
What practical measures can you take to hold onto cash?
To begin with, predict your financial needs from the start and raise cash accordingly.
Then, minimise expenditure where you can. For example, use free software or SaaS to run your business. And don’t spend money on expensive office furniture.
After that, you can consider paying your people more in stock.
Venture debt is a form of debt financing. It was explicitly developed to meet the needs and the perceived risks associated with tech companies. And thus, is ideal for extending cash runways.
In contrast to cashflow financing where underwriters look at how long you’ve been in business and how much profit you generate. A debt funder is more concerned with the quality of your business plan, revenue streams, and capital strategy.
And unlike asset-based finance which secures loans on collateral in the form of fixed assets, a venture debt funder leverages your intellectual property assets.
Elsewhere, venture debt funding is different from equity in that you do not need to dilute the ownership of your business.
It’s always better to look for funding long before you need it.
A point often overlooked is that debt can be structured flexibly so that you draw it down as you need to deploy it.
Therefore investigate debt funding options when you negotiate your equity term sheet.
Venture debt is available from banks and debt funds. To get the best deal, talk to a debt broker.
In the news, investors are warning tech companies to hold onto cash.
To weather the economic storm and to reach your growth milestones, they recommend you have an 18-24 month cash runway.
With this in mind, explore both practical and financial options to minimise your burn rate and maximise your runway.
In particular, venture debt funding is ideal for extending your cash runway. Use it to give you a comfortable lead time for reaching your milestones and raising further funds.
And to put you in a strong negotiating position so that you needn’t have to accept less favourable terms from investors.
Or have to rely on unsuitable debt finance products offered by bank lenders.
The good news is it doesn’t have to be you that sources debt finance deals. You can save time by talking to a debt fund broker.
Trust me. You’ll be glad you did.