Managing burn rate is a critical aspect of running a startup, especially in a recession or protracted economic downturn. The market has shifted and so have investors’ expectations. It’s no longer a game of growth at all costs — sustainability, profitability and efficiency are the new key performance indicators catching the eyes of investors.
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This change means that founders need to focus on burn rate now more than ever, so I’ve put together my thoughts on how to manage your startups in today’s economic climate.
What’s your break-even point?
First and foremost, founders need to have a clear and realistic financial plan. This includes having a detailed understanding of the startup’s current financial situation, and projecting future financial needs based on different scenarios. Startups should also have a clear understanding of their break-even point, which is the point at which the startup is able to cover its costs and generate a profit. By understanding the startup’s break-even point, the company can better manage its burn rate and ensure that it is able to generate enough revenue to cover its costs.
A key component of that plan is cash flow management. The ability to monitor and manage the startup’s cash balance ensures that bills are paid on time and provides an accurate perspective on when new funding will be required to continue operations. Given the constraints of this cash flow management plan, a refreshed and resilient take on the business model can be created. This includes finding ways to diversify revenue streams, building a strong and loyal customer base, and developing a business model that is scalable and sustainable.
Planning for future growth
Startups should also consider developing a strategic plan that outlines how they will navigate the recession and position themselves for future growth. If fresh venture funding will not be available for a year or two, founders need to actively seek out new sources of funding. Implementing a line of credit while the balance sheet and revenue are strong is a good first step, but other forms of short-term financing such as venture debt should also be considered.
Finally, it’s important for startups to have clear and open communication with their investors, employees and customers during times of uncertainty. This includes keeping investors informed of the startup’s financial situation, explaining any cost-cutting measures that have been implemented, and providing regular updates on the startup’s progress. Founders should also be transparent with their employees about the challenges they are facing and how the company is working to overcome them.
In conclusion, how founders manage their startups burn rate is essential during times of economic uncertainty. Startups should concentrate on executing cost-cutting measures, having a clear and realistic financial plan, focusing on cash flow management, building a strong and resilient business model, and having clear and open communication with their investors, employees and customers. By implementing these strategies, startups can increase their chances of success during a recession and position themselves for future growth.
Marc Schröder is the managing partner and co-founder of MGV, and is focused on working with world-class tech entrepreneurs and establishing the MGV legacy. Before co-founding MGV, Schröder served as the head of global sales at the Maschmeyer Group and was an investor at Seed + Speed Ventures. Originally from the Netherlands, he grew up in South Africa and graduated with a law degree from Bertolt-Brecht University.
Illustration: Dom Guzman
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