The software finance leader’s guide to extending your runway

Tactical measures that you can take to help your team ride out the coldest summer in the Valley

The past few months have seen a sharp reset in venture activity. Finance leaders have been scrambling as founders prepare teams for a “VC winter.”

While it’s impossible to predict what comes next, the general consensus is that we are transitioning to a “risk-off” environment. Investors have cautioned founders and finance leaders that less capital will be available in the next few years.

Even for companies with a healthy balance sheet, now is the time for an audit of finances and the extending of runway to survive the new market environment.

How much runway should we have?

Three years of runway would put most startups in a strong position to ride out a potential downturn. Craft Ventures recommends thirty months of runway, while we’ve heard compelling arguments for thirty-six months. History teaches us that markets take two to three years to revert back to a normal funding environment.

You need more runway than you think. Remember that you’ll want to start a fundraising process with at least nine months of cash in the bank. Are you comfortable with the revenue projections at this nine-month mark? It is this revenue—at the time of raising—that will determine the outcome of your next round.

What can you do about it?

Let’s jump into tactical measures that you can take to help your team ride out the coldest summer in the Valley.

1. Trim sales & marketing spend

First, audit Sales and Marketing (S&M) spend. Specifically, examine sales efficiency. How did the S&M spend compare with the New Sales ARR that was added? Depending on your go-to-market motion, comparing last quarter’s spend with this quarter’s ARR for new customers is the closer proxy for efficiency. The quarterly offset will help connect outcome to prior spend. If you have a longer sales cycle, you may want to offset this figure by two quarters. If New Sales ARR is equal to or less than S&M spending, consider cutting costs.

Another important efficiency metric is customer acquisition cost (CAC). This is calculated by dividing S&M expense in the prior quarter (or month) by the number of new customers in the current period. Once you have this figure, you can work out how long it takes for a customer to generate enough gross profit to pay back the cost of acquiring them in the first place.

CAC payback = S&M spend in a month / (MRR * gross margin)

In a market where free cash flow is king or queen, long CAC payback periods may no longer be feasible. Frivolous advertising on Linkedin or Google might be the first to go. The extent to which one is willing to accept outsized S&M spend will depend on the lifetime value (LTV) of your customers and the runway you have, or need to create.

You as the finance leader can make a huge impact on business outcomes by illuminating areas of poor investment and allocating capital efficiently in these markets.

2. Audit unnecessary expenses

Use an expense management system to review and root out unnecessary expenses. A tool like Airbase can connect credit card spend with a process to categorize transactions, produce analytics, and provide controls on spend. Pay attention to cloud costs and other large ticket items.

Executives sometimes delay trimming expenses as it feels incremental and can take a toll on morale. Now is a good time to remind the team what kind of company culture you are building, and where—as a team—you are investing. Is it transitory perks? Or is it delivering value to customers and building an enduring business?

3. Consider a hiring freeze

Revisit your hiring plan and consider freezing hiring for everything but key roles. Before cutting roles completely, connect the hiring plan to how it impacts revenue projections. A financial planning tool like Mosaic can help centralize cost data, model the different hiring scenarios, and create revenue projections to assess impact. This exercise will help indicate the type of fundraise—down round, flat round, or up round—you are looking at in two or three years' time. You will likely need to continue to attract star talent in some roles to grow your business.

Encourage your team to include lower-cost areas in talent searches. The easiest way to get started is to do a quick survey of similar software companies headquartered outside of the Bay Area. Is their talent diaspora relevant to your open roles? If so, you could focus outreach to such candidates who may have a lower cost of living. With the rise of remote in the past few years, chances are that your team already knows how to function well as a distributed company. But don’t forget, hiring remotely can have tax implications.

Some of the most iconic software companies were created in the two years following the 2008 financial crisis. In a “risk-off” market environment, hiring may indeed become easier for those with strong runway positions. Identifying what roles to hire for and what roles to pull back on will make all the difference.

4. Re-evaluate your real estate needs

Real estate can be a major fixed cost. Given typically long lease terms, the space you are leasing is likely to exceed the size your business needs today.

Lease commitments are legally binding, so your best options for improving your cash flow outlook with real estate is to seek to recover some of the future sunk cash flow through subleasing a portion of your portfolio. If your cash flow situation is particularly dire, check if your landlord may be willing to renegotiate your lease depending on the market. If your head count is going to continue to grow, look for strategies to increase density or utilization of your existing space to bridge to your next funding round.

5. Keep a close eye on compensation

Tech salaries have increased significantly in the “risk on” environment and may shift back to pre-pandemic levels in the “risk off” environment. As the leader that often signs off on compensation, keep a close eye on today’s compensation market. Tools like Pave can be a useful reference for real-time data.

The other secret to fair compensation is making sure your founder has introduced you to your investor’s recruiting team. They often see offers made to other folks in the portfolio and can help ensure that your team is adjusting as appropriate and continuing to make competitive offers.

6. Reduce your liabilities

As you position the company for a successful fundraise or acquisition in a few years time, it is important to reduce liabilities where possible. One area where you can make a difference today is sales tax.

As you sell software in SaaS-taxing states like New York, Texas, and Washington, ask yourself whether you need to collect sales tax from customers. If you should but are not, you have a liability on the company books that is likely to turn into cash costs as states look to increase their revenues during a downturn through audits. We’ve seen that this can cost the average SaaS business 4.3% of revenue, if not proactively addressed. ⊞