I didn’t know exactly where I was driving, but the sun was setting behind a field full of cows, the battery in my hybrid was nearly depleted, and the fuel light was blinking. I needed a plan.
Despite intermittent cell phone service, I navigated to a gas station, driving 5 miles per hour the entire way. If you’re managing runway at a seed-stage or Series A startup in Q3 2023, that’s what English majors call an allegory.
Follow-on financing is hard to raise these days, which means founders must watch their spending like hawks while keeping the peace with their investors like sweet, cooing doves.
Which proofs are investors looking for before they’ll commit to additional funding, what’s an acceptable burn rate, and how much runway do you need before raising more? At TechCrunch Disrupt, I spoke to three early-stage VCs to get their unfiltered advice for founders who are trying to keep the lights on long enough to reach product-market fit:
- Anamitra Banerji, managing partner and founder, Afore Capital
- Frédérique Dame, general partner, Google Ventures
- Rick Yang, partner and head of technology, NEA
When is it time to start raising your next round?
If you haven’t found traction with customers and aren’t generating revenue, you should be in fundraising mode already.
“Pre product-market fit, you want to have as much runway as possible because that’s really the goal of being a seed stage startup,” Yang said. “It used to be [that] maybe you have six months of runway left, and you go and raise your next round. Now, more is better because of the market being a little bit more volatile.”
If you haven’t found traction with customers and aren’t generating revenue, you should be in fundraising mode already.
Series A fundraising “is much trickier now,” Dame said. “If you don’t have the right vision and the right unit economics, it’s really hard to raise the next round.” These days, it’s not enough to simply show “your path to profitability,” she added. “This is really an exercise of building great partnerships with investors so when you set up to raise, it makes it easier for you.”
A pre-seed startup generally needs at least 18 months of runway, Banerji said. “It allows you to make a number of tries without overhiring, pivot if you need to, [and] essentially figure out [how to get from] the first five customers to a pathway to a million ARR.”
Follow-on funding is a challenge, “but there’s a lot of capital available now, just from angels or just from pre-seed or seed funds,” he added. “So getting to $500K to $2 million is very achievable in a couple of months’ time frame.”
Every panelist agreed that a founder should know their burn rate and remaining cash balance off the top of their head: “It gives me a lot of comfort when they have basically thought about and are marinating and are obsessing over every aspect of their business,” Yang said.
Where founders can save money, and how investors can help
Once upon a time, seed-stage startups bought foosball tables, keg coolers and fancy espresso machines to make their high-end workspaces comfortable and competitive. But since the shift to hybrid offices and remote-only teams, cost centers are moving elsewhere.
To slash costs, Banerji said founders should start by asking their investors for cloud credits. “All sorts of software that you need to run a company is given out for free,” he said. “That adds up to around $500,000 in totally equity-free money.”
Dame said Google Ventures offers advanced marketing assistance. “Really understanding your go-to-market strategy (GTM) for consumers — what are your pay channels versus organic channels? The faster you get to more organic growth, the better you can [produce] product-market fit.”
For AI-related startups, hardware costs are soaring, and “that’s completely throwing off the notion of what should a seed-stage company be burning,” Yang said. “That’s something that I would also expect founders in that space to understand and be able to communicate: what the strategy is and how that dictates capital raises down the road.”
What are some near-term revenue opportunities companies can leverage?
If we assume that a successful startup needs approximately 18 months to reach PMF, Banerji said teams should consider charging new customers for related professional services to generate cash that offsets their monthly burn.
“You can think of it as like consulting: The customer is paying the company for two months to implement the product. This way, the company is making some money and also potentially getting a customer that will pay them for software eventually.”
Because enterprise software sales tend to have long sales cycles, Banerji said he encourages founders to “sell to smaller businesses who make faster decisions.” They certainly won’t pay as much, “but they’re willing to commit faster and contribute to revenue.”
Dame said founders shouldn’t be too attached to their initial plans, whether it’s their business model or GTM strategy. Teams need to be creative when it comes to “what will get you to survive or extend one way and generate revenue before the long-term game is in place.”
Raising prices is a great way to extend runway while gaining insight into your customers, said Yang. “If they say yes too quickly, you probably know you’re also underpricing it, and you’ve got something great on your hands. So it’s never a big deal to ask.”
When it comes to paying your own vendors, “it’s not a bad idea to renegotiate if you can,” Banerji said. “In most companies, most of the burn comes from people, and the rest of it comes from vendors or software that they buy. I think with AI, that might be going up because of the token rates.”
Do startups still need to pay for a physical office?
The pandemic convinced many founders that they could eliminate the time and expense associated with maintaining physical offices, but Dame and Yang said that those savings come with a trade-off.
“Remote-first can be great for hiring the right talent that is not tied to a geographical location, and also cheaper,” said Dame, but “when you’re building a company — especially a very-early-stage company — you’re losing a lot of momentum in terms of development cycles, feedback loop, and iterating.”
She advised using a hybrid model, since “a few days a week is actually critical to really test your product-market-fit of teams collaborating and have great velocity within your business.”
A shared office space gives an investor a better understanding of company culture and operations. “From an investor standpoint, being able to feel that and see that if it is remote-first, it’s just harder.”