In the world of startups, maintaining control of your descent is crucial, just like landing a plane on a short runway. As of 2023, many early- to mid-stage startups are facing tough financial conditions. Recent research revealed that a staggering 81% of early-stage startups have less than 12 months of runway left, and the post-SVB venture investment freeze has added to the challenges.
Given these circumstances, numerous companies will be forced to navigate a difficult path, with growth becoming more challenging, and a shortage of venture capital pushing them to act swiftly.
For startups that have been working tirelessly without finding product/market fit, a critical decision looms. With capital in short supply, they have several options:
Keep Pivoting: You can persist in your quest for product/market fit, but eventually, you’ll need fresh capital to sustain the business.
Shutdown: Alternatively, you can decide to close down the company and return cash to your shareholders.
Think Like an Investor: There’s a third option—shift your mindset and think like an investor to secure a more graceful landing.
Consider this hypothetical scenario: A Series B stage startup has $20 million in cash but is burning $2 million a month, giving it 10 months of runway. With no clear path to profitability in its current business model, raising a Series C seems unlikely. Instead of continuing down this path and reaching the edge of the cliff when the 10 months are up, the startup could reduce its burn rate to nearly zero and hold onto its $20 million in cash.
In this situation, the startup could actively seek a merger with another company, offering its intellectual property, user base, remaining team members, and, most importantly, its cash, as consideration in the merger. The $20 million in cash is highly sought after in today’s market. Rather than facing a complete winddown or a small acquihire, this company could end up owning 25% of another company, opening up a clear path forward to redefined success.
For founders with cash on their balance sheets but no clear path forward, there’s a unique opportunity to adopt the role of a venture capitalist and “invest” the company’s cash and equity into a new venture.
How to Make It Happen:
Engage the Board: Have a candid discussion with your board and lead investors to determine if it’s time to explore other options. They can be valuable advisors and potential connectors.
Reduce Costs: To preserve your cash, cut costs wherever possible, including marketing, software spending, and headcount.
Identify Potential Acquirers: List the companies in your industry that could benefit from acquiring your startup. Consider those with strong growth potential and who could leverage your team’s expertise.
Initiate Conversations: Leverage your network for warm introductions and start discussions about potential mergers. M&A processes can be time-consuming, so early action is essential.
Negotiate and Decide: Once options are on the table, it’s up to you to decide if a deal is the right move. Collaborate with your acquirer and investor base to reach a favorable outcome.