For a start-up one of the most critical single numbers is ‘cash on hand’ (well, that goes for most companies but for a start-up it is even more critical because there is no income stream yet to match expenses in the pre-launch phase).
Typically the amount of cash-on hand divided by your fixed expenses gives you your remaining runway (the amount of time that you have before you have to take off).
So anything that helps you to reduce your fixed expenses or that increases your cash-on-hand is a great way to extend your runway, and that in turn will help you to increase the chances of success for your newly minted company.
Saving money is a lot easier than making money (up to a point), and by saving money you make it easier to get to ‘launch’ and after launch you make it easier to get to the break-even point.
Here are some very practical tips on how to increase your runway for the first year or so of running a company.
- if you're in the b2b sphere, hook up with a customer and ask if you can use a room in their offices
If you think that's strange consider this: it's a win-win. Your future customer gets a front row seat to the development process and their people are on hand for input, testing and hopefully to hand you some cash on the date of launch. You could structure the rent as a down-payment on the product once it is is ready, or you could get them to ignore the issue of rent completely. It's good for both of you, you get the benefits of an office and they get the benefit of a direct line in to the heart of the project on a product they will use. We've used this several times in the last 25 years and it worked well every time, the customer was extremely happy with the product and me and the people I worked with felt both strongly supported in our choice to develop that particular project as well as found many ways to use the proximity to our advantage in ways that far exceeded just having some office space. I think the product came out better than it ever would have had we developed it off-site.
- Do you really need that?
That's a tough question to ask, especially when it comes to tools. What I've found over the years is that every time that you ask yourself that question the answer usually is: "No, not really". Have to haves are more often than not 'nice to haves', and being frugal when the money still seems plentiful translates in to lots of extra time on the back end, when the money gets tight and the time is running out. That $1500 for a new computer that you spend in the first month is $1500 you won't be able to recover in the last month, but by then you'd gladly trade that computer for the initial cash outlay in order to be able to eat for another month. You can't really 'unspend' money. So better make sure that what you buy is stuff that you *really* need to buy. That goes for many things that at first glance seem to be required in order to run an office. A couple of desks, a whiteboard, office chairs, computers and so on. It *really* adds up. An improvised desk, a glass pane attached to the wall, second hand stuff instead of new, by the time you add it all up the difference is huge.
- Charge for milestones achieved
Again, this will only work in a b2b setting. But if you have a product that you already have at least one potential customer for and you are 100% sure that you can push the project to completion (in other words, there are no unknowns or gotchas that you can see along the path to the finish from where you are today) then it is perfectly ok to enter an arrangement where - for instance, in return for a sizable discount - your launching customer pays you for reaching certain milestones. It may even be possible to trim the ambition of the first release of the product back to a barebones version (that famous 'minimum viable product') and to get an advance on the delivery with the balance paid when the MVP is ready for production use. Working with your customers is a lot easier than working with a bank or an outside investor, your customer will see things your way and knows in a way that no outsider ever will be able to know what the product can do for them and what it is worth. If there is a basis of trust and your reputation is one that reflects your ability to deliver in a positive way this might be an excellent way to validate both your relationship with your customer and your product in one go. Negotiating this works best if you have not yet started the development of the product, and it is hardest when you are behind schedule.
- Crowdsource your funding
The b2c version of that is the pledge system, where consumers pledge to fund your company in return for early access to the product or a pre-order mechanism. Be very, very careful with this. Kickstarter and a number of other institutions take the sting out of this but regardless of which way you go, if you decide to take money from the general public you *have* to deliver and you *have* to deliver on time. There will be no margin for error, your reputation is shot the moment your self imposed deadline has passed and you have not delivered your product. Examples of companies that tried this and had their reputation damaged are legion. The word 'vapourware' is a close cousin, it stands for announcing a product without actually having that product. Announcing your are going to build a product, taking in money and then not delivering is worse.
- Hire the right people/find the right co-founders
Having the right people as co-founders and early hires can make a huge difference in the amount of money that you will be spending on outsourcing stuff. Outsourcing seems like a great idea but it is actually a profession all by itself, and one that you either have experience with or that you can't afford to learn in the situation of a typical start-up. So look long and hard at who is going to form the core team of your organization, and try to arrange the skills mix in such a way that the word 'outsourcing' is not part of your vocabulary. Of course there are exceptions, if for instance you are doing a hardware start-up it is cheaper to have your PCBs etched, drilled and silkscreened by a company that specializes in that, the economics are not on your side to set that up for a trial batch. But as a general rule it would be best to have all the skills required to complete the MVP in-house. And making those early hires co-founders might not be such a bad idea, it gives you more brainpower as well as access to people that have their goals solidly aligned with yours. Spending your start-up funds on things like taxes and other big corporation niceties is a great way to burn through that money in record time. It is better to have a slightly smaller piece of a larger pie than to have no pie at all.
- Rent, don't buy
Equipment that you need for just a little while is best rented, or even borrowed rather than bought outright. Even things like printers, faxes and (high quality)scanners fall in to this category. It is utterly pointless to spend your money on a device that will sit idle 99% or more of the time. The same goes for server hardware (which you can easily rent on a month-by-month basis, or using the likes of EC2 on an hourly basis) until you are ready to launch. Then it makes sense to make the decision to continue to rent or to buy depending on the economics.
That’s it for now, I’m sure there are more ways to extend your runway than just these, but they hopefully give you inspiration to come up with a few of your own. If you have a good one and you want me to add it to the list mail me please: firstname.lastname@example.org.