Which way is up? The end of free money and the importance of keeping cash on hand

It’s always hard to run a startup, but at least in 2021, you knew what you were supposed to do: Grow fast.

Now, it’s not so simple.

At your board meetings, you have one investor complaining that you aren’t growing fast enough, another complaining that your burn ratio is too high and another warning you to extend your cash runway. You know you can’t please everyone all the time, but it would be nice to feel like you can please someone sometimes!

Ultimately, it’s not your job to please anyone. You have to choose the right path for your company. In the end, what matters is building a great company — and, a lot of that depends, quite simply, on not running out of money.

Here are my thoughts on how to approach this issue based on my experience as a former CEO and current board member and adviser to several technology companies.

Money is no longer “free,” and that changes everything

They say time is the one thing you can’t buy, but in fact, time is the easiest thing to buy at a startup.

When interest rates were near zero, future revenues and profits were nearly as good as revenues and profits today. Capital markets were willing to make massive investments to build what investors believed would be strong profit streams far into the future.

The playbook: Pour money into sales and marketing and become a category leader; eventually, as the market recognizes your leadership, revenue will accelerate. Efficiency in the present didn’t matter because in the future — when the company had scale, a stronger brand, a more mature product and a more educated end user — efficiency would increase.

Well, investors today care about the less-distant future. They care about how much money they need to put into your company to get to that future and when it will arrive. If you can earn more than 6% with investment-grade bonds, speculative earnings that are 20, 30, 40 or 50 years into the future aren’t nearly as valuable as they were when interest rates were near zero.

You aren’t the only one who is confused and stressed

If you raised money in 2020 or 2021, you don’t know what a tough fundraising environment is like, and you’re likely getting contradictory advice from investors and advisers.

Which way is up? The end of free money and the importance of keeping cash on hand by Ram Iyer originally published on TechCrunch

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