With talk of an economic downturn and a slowdown in venture funding, startups are having to figure out how to get to profitability quicker, and extend their resources without raising additional money.
Heřman Kopkáně is CFO of the Czech Republic’s first startup unicorn, Rohlik Group. He led the online grocery business through its €220m Series D, and is now focusing on extending the company’s runway to avoid having to fundraise for a couple of years. He recommends startups plan for at least two years of runway to see them through until the market stabilises — and cut down where possible to avoid laying off half their workforce, like many others have been forced too.
In our Startup Life newsletter, Heřman (who spoke at the Sifted Summit yesterday) shares his top tips for how to extend your runway.
Slow down your expansion plans
Expanding into a new region or market gets costly very quickly. For Rohlik, expanding means establishing new fulfilment centres, buying cars, growing the team and, of course, marketing.
To decrease burn rate, cancel any plans for new markets; slow down the growth in newer ones you’ve just launched in; and double down on the regions you are already in. We postponed our launch in countries that are expensive to set up in, like Spain, and slowed down our expansion in Germany.
Aim for higher spend, not new customers
If you are a B2C company and your business model allows you to, encourage customers to buy more by providing a wider assortment of products, better service and deals on multi-purchases. Then the average transaction value will make each delivery more profitable. If customers make small purchases with limited margins, and delivery costs are going up, it just does not work.
Centralise the budget
Often in startups, budgets are given to individual departments or projects. For example, if you’re expanding to Spain, the Spain team will have its own runway; when cash runs out, the company can exit the country.
If you want to be profitable — instead of just focusing on growth numbers — change your strategy to view it as one central budget. Each moving part should support the other. Back to the Spain example: if there’s a cost of living crisis and no one has extra cash to spend, slow your marketing activity to a minimum — save money without having to shut it all down.
Centralising the budget also creates better visibility for the CFO so they know when to speed up different functions again.
Communicate that you are prioritising profit over growth
You want the team to think about every single cent they spend. The overall messaging is that saving money in all areas saves the company and jobs.
You want there to be a business case for every expenditure because teams often underestimate costs and overestimate benefits. Do you really need that software? Yes, it may make you a bit more efficient but the payback is not fast enough. Will that new marketing channel really dial up our sales? Will new furniture really improve work morale enough to improve output?
You’re not trying to save 20% of your spending, you want to spend nothing unless absolutely necessary in order to survive.
Keep your investors in the loop
Your growth plans are going to look different to the ones you originally pitched to investors. You need to discuss your reevaluation of the market and your strategy with them to keep them onboard for the long run — you may want to raise more money from them in the future.
Explain to your investors that due to the state of the market you aren't going to raise anytime soon, or at least not with favourable conditions. Explain that because you can't raise, you won't have a liquidation event in the next couple of years — or not one with a high internal rate of return (IRR) anyway. They need to know that you are playing the long game.
On the subject of... Extending your runway
🔍 Focus on the fundamentals. To survive this period of time, you need to look at your cost of acquisition, your pricing strategy and how you’re managing your cash.
💵 Let your CFO do the hardwork. Shifting power to your CFO during the downturn could be exactly what your startup needs to save money. This is what they’re trained for after all!
💰 How to manage cashflow in a crisis. An oldie, but a goodie, from the Sifted archives.
⛓️ Constraints are good. An excellent Twitter thread on how one startup extended its runway.
🥾 Bootstrapping is the way to go. Avoiding taking VC funding can help you have a healthy balance sheet and sound unit economics from the get-go.