Cash Management for Early Stage Startups
Cash Management for Early Stage Startups
25+ tips and strategies to increase your company's odds of success
Most startups fail because they run out of money. This is generally true, but it’s especially true in today’s economic climate.
Sometimes companies run out of money because they never had enough capital for their plan in their first place. But sometimes bankruptcy is self-imposed by careless spending, weak decision-making, or poor financial hygiene.
This post is a collection of cash management heuristics, tips, and strategies that I’ve accumulated over the past decade of investing in and working with 200+ startups like Robinhood, Flexport, and Mux. While these tips are aimed at venture-backed startups, many of them apply to bootstrapped startups as well.
Core Framework
In order to optimize your cash position and your odds of success, you should focus on four key pillars, which I call the ARGO framework:
💰 Acquire more cash. A great way to avoid running out of money is to get more through various forms of funding.
✂️ Reduce costs and push them back. The lower your costs and the later you can pay them, the better that is for your cash position.
🌱 Grow revenue and pull it forward. The more you sell and the faster the money lands in your bank account, the better that is for your cash position.
⏱️ Optimize operations. A great way to not run out of cash is to get more leverage out of each dollar through improved efficiency.
The ARGO framework helps improve your odds of surviving and thriving from a cash standpoint.
Now, let’s dive into tips and mental models for each of these areas.
💰 Acquire More Cash
When fundraising, add 6 months of cushion to your fundraising target. In the worst case, you will need 6 months to either raise your next round or run an M&A process. In the best case case, you will have more runway to hit break-even. You don’t want to hit all of your target milestones the day you run out of money because, well, you’ll be out of money.
If you’re currently fundraising, raise the right amount. If you need $3m to execute on your plan, don’t raise $2.5m — that’s a lot of dilution to take and it won’t be enough to hit your target milestones.
A good financial model can help you triangulate the proper round size. Some tips for building a good model can be found below:The worse the fundraising climate, the more willing you should be to raise money on any reasonable valuation. The better the climate, the more picky and reluctant you can be.
Concerns about dilution should be inversely proportional to your likelihood of running out of money.Take advantage of startup tax credits with services like MainStreet or Neo.tax. Tax credits are free money, and they’re surprisingly generous. Both Canada and the US offer R&D tax credits — and I’m guessing other countries do, too.
Put your money into a safe, high yield account like Vesto.1 You can earn 4.5+% on your idle cash using highly liquid, low risk investments like US treasuries and CDs. If you have 24 months of runway and you put your cash into a high yield account, you'll get an extra month of runway for free.
Avoid risky investments like high yield crypto schemes unless you want to gamble with a small portion of your cash.Send regular investor updates. Investor updates are basically a customer success tool. If you send updates then there’s a much higher chance that your existing investors will invest in your next round; if you never communicate, existing investors become a poor source of future funding.
Use cards like Ramp or Brex to earn rewards on your corporate spending. It’s an easy way to get 1%-2% back on your costs.
Consider venture debt or non-dilutive revenue-based financing. Venture debt is usually tied to a VC funding round. Revenue-based financing becomes available around $50k+ MRR, and you can typically borrow 4-8 months of MRR at a 10%-20% interest rate. That’s not cheap, but it’s not bad if your company is growing rapidly.2
If you’re about to fundraise, work on your storytelling skills, pay $1k-$2k for a designer to polish up your deck, and practice your pitch a lot. The ROI on improving your fundraising skills is immense given that an investment of a few dozens hours can lead to hundreds of thousands or millions more dollars for your company.
✂️ Reduce Costs
Make cost-cutting decisions quickly. The earlier you cut a cost, the more money you’ll save.
A lot of companies increase burn quickly after raising around. One joke in the VC industry is that no matter how much a startup raises, the money somehow always lasts about 18-24 months. Stay lean before you have product/market fit and resist the temptation to spend quickly.
Common cash management mistake: ramping spending quickly after a fundraise. It's like being a lottery winner: you've been scraping by & finally have $$, so you go on a spending spree. This is often a mistake. Ramp spend gradually until you understand where to invest aggressively.A good rule of thumb is to set a cap on net burn, like $100k/mo. If you want to spend more than $100k/mo, you’ll have to make up the difference with revenue. One perk of this approach is that runway calculations become easy: if you raised $3m and you are capping net burn at $100k/mo, then you have at least 30 months of runway.
Unfortunately the most effective way to save a lot of money is often to do a layoff. If you have to do layoffs, make sure you only do them once. Three rounds of 10% are much worse than one round of 30%. Morale gets crushed with multiple rounds of layoffs, and you save less money because the rounds happen over months instead of all at once.
When possible, prioritize contractors and on-demand help over full-time employees. Do you need several full time designers or just one? Do you need a full-time designer, or would a design contractor suffice? Do you need a contractor, or would an advisor be enough? Finally: do you need an advisor, or is the design good enough for the foreseeable future?
Be frugal. Negotiate what you pay to your vendors, leverage discounts that you get from investors or founder communities, and so on. For example, at Susa Ventures we have an internal Notion doc for with about 100 discounts we’ve negotiated for cloud infrastructure, HR tools, sales tools, corporate insurance, you name it. If you’re going to spend $250k this year on products like these, why not look for discounts and save $50k-$100k?
Think about “dead time” when hiring employees. Don’t hire a front end engineer 3 months before you’re ready to build the front end. Don’t hire a salesperson if they’re going to be ready to sell right when your business has a seasonal slowdown. Time your hires so that you can maximize the value that each person brings to the company.
Prefer renting/on-demand over buying, especially when you have limited runway. Let’s say you need a server that will last for 5 years, and you can buy it for $5k or rent it on AWS for $150/mo. If you have 12 months of runway, rent! If you have 3+ years of runway then buying might make sense. Maybe.
TCO (total cost of ownership) calculations are useless if the lifetime of owning something is much longer than your company’s runway.Run minimum-viable experiments. Do you need to spend $20k to see if AdWords is a good channel, or can you start with $2k or even $200? If you’re not sure if you need an EA, can you start with a temp or Athena instead of hiring someone local?
Defer costs as much as possible. It’s better to pay $1k/mo for 12 months than to pay $12k upfront. It’s even better to pay $12k at the end of twelve months — even if there’s a small additional penalty for that. The later you pay for things, the more cash you have remaining today. Services like Ramp Flex can help here.
🌱 Grow Revenue
Prioritize customers that will pay you more, or that don’t mind paying you upfront. Revenue is the opposite of costs in terms of timing: $12k in revenue today is better than $1k per month, which in turn is better than $12k at the end of the year.
Prioritize customers with a shorter payback period. A $200k ACV customer with an 18-month payback period is worse than a $50k customer with a 1-month payback period.
Alternatively, give customers a discount for paying up front, or use a factoring service like Pipe. A factoring service will give you ~90 cents on the dollar for the value of a contract, and then they’ll collect the future revenue on that contract.
Look for easy wins to expand your customer base or increase your ACVs. For example, can you sell your product internationally by outsourcing a lot of the complexity to Stripe? Can you create a subscription version of your product if it’s normally a one-time sale?
If you’re in a real bind, consider nontraditional or unscalable revenue sources. Anything from consulting work to selling cereal. Just remember that you need to make enough money to eventually invest in the core product, otherwise you’re just treading water and postponing the inevitable.
Experiment with pricing! Most companies undercharge because they take a guess at pricing at launch and then that’s their price forever.
Generally speaking, you should try to capture 15-25% of the value you create. E.g. if you can help a customer generate $100k in extra profit, you should be charging ~$20k (not $2k and not $80k). A few pricing resources: Monetizing Innovation and Pricing your SaaS product.
One good pricing heuristic: keep doubling your prices after every few sales until the majority of prospects push back.
This is probably my favorite tip because a startup can 2x or 5x its revenue in a short period of time just by being smarter about how its products are priced.
⏱️ Optimize operations
Experiment, experiment, experiment. Experiments will help you grow and optimize your business. For example, spending $25k on an AdWords campaign probably performs worse than spending $5k to try ten campaigns and then spending an additional $20k on the best one.
Parallelize work as much as possible. For example, do you have to wait for your engineering team to finish building a feature to start creating marketing copy for it? Or can you create copy at the same time as the feature is being developed? If you do tasks serially instead of in parallel, then you’ll have teams of people waiting on the output of other teams of people instead of actually doing work.
Use funnel optimization tools to improve your sales and marketing conversions. Basic off-the-shelf tools can quickly improve your sales by helping you identify basic issues in your existing GTM playbook.
Maximize your “at bats”. Let’s say your targeting becomes 1% better every time you publish a newsletter post and track the results. If you write a monthly newsletter, your targeting will improve by about 12% this year. If you publish weekly, your targeting will improve by almost 70%. The more “launch → get feedback → iterate” loops you can execute, the more progress you’ll make.
If you’re dependent on future fundraising, optimize for “ROI before the next fundraise.” For example, if you have 6 months before you need to raise, don’t point your entire sales team on prospects that will take a year to close. Similarly, don’t hire someone who will need at least X months to ramp up if you have to raise in <X months — that just increases your burn but won’t get your company to a better spot before your raise.3
Identify and address your largest bottlenecks. If you get 5 leads per month and 80% of them turn into customers, then it’s much better to try to grow 5 leads to 50 than to try to improve your close rate from 80% to 100%. But if you have 5,000 leads per month and 1% of them turn into customers, then you should focus on improving your close rate (or figuring out why your leads are so poor), not on growing the number of leads. Find your bottlenecks and eliminate them.
Parting thoughts
To recap the ARGO framework:
💰 Acquire more cash through fundraising, revenue-based financing, factoring, and high yield corporate accounts.
✂️ Reduce your costs by renting instead of buying, cutting costs quickly, and running small tests before going all in on expensive initiatives.
🌱 Grow revenue by expanding who you sell to, increasing prices, and prioritizing customers with favorable economics.
⏱️ Optimize operations by doing lots of experiments, using off-the-shelf tools to improve your sales and marketing funnel, and moving quickly.
Finally, while the advice above will help you manage your startup’s money better, it’s important to remember that “you can't cut your way to success.” You can extend your runway and be more efficient, but ultimately you have to create something that customers want and will pay for. If stretching your capital further helps with that, then great. But if you feel like extending your runway is just postponing an inevitable shutdown, then stop trying to extend your runway.
Most of us get 40-50 years in a career, if we’re lucky, and every year you spend on something that’s not going to work out has a huge opportunity cost. So be frugal, experiment, and optimize your cash flows, but don’t forget that the ultimate goal is to build a high impact, lasting business. If you’re not progressing toward that goal then it’s okay to change direction.
If you enjoyed this post, I recently gave a talk hosted by Stripe on how startups can weather the current economic climate. The recording can be found here.
Disclosure: my fund is an investor in Vesto.
I’m a general partner at Susa Ventures, and there are several Susa-backed companies that raised seed rounds and then used revenue-based financing to reach $10m+ ARR without having to raise Series As.
This is an overgeneralization. Most startups are simultaneously optimizing for a great eventual outcome and for a good next round. Of course you’ll need to occasionally lay the groundwork for long-term initiatives that won’t impact your next fundraise. But you should think about these initiatives carefully, because in the short term they reduce your runway and increase your chances or running out of capital.