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No spring in sight for funding’s nuclear winter. How should startups respond?

iStock 1298861917 - Global Banking | Finance

104 1 - Global Banking | FinanceBy Christina Ross, CEO, Cube

It’s no secret – times are tough for startups looking for funding. With the largest quarterly drop in more than a decade, gone is the promise of endless capital without guardrails. According to CB Insights, total venture funding was down 23% this quarter and mega-round funding of $100M or more is down to a 6-quarter low.

As venture capital continues to dry up, startups and scaleups of all sizes are facing the harsh reality that they might not have enough in the bank to get them through the next two years. Should they consider hiring freezes or layoffs to buy time? Or pare back the product roadmap and reevaluate what’s truly mission critical? Unfortunately, there’s no right answer.

As a serial CFO turned CEO, I’ve seen companies through multiple recessions and faced the uphill battle of securing funds during the first few weeks of Covid-19, as well as during the unreliable market earlier this year. What these experiences have taught me is that the best offense for any startup to have is multiple plans for defense.

To plan or not to plan, is not the question. It’s how many plans you’ll actually need.

Too often, companies start out with a business plan they believe is airtight and immune to turbulence. Then, the world turns, and the original forecasts and aspirations no longer hold up. This is why multi-scenario planning should be baked into growth strategy from the very early stages of every company. With origins in the Cold War era, scenario planning helped predict the unknown outcomes and challenges from a potential nuclear war.

Today, survival doesn’t depend exclusively on an inspirational Plan A. Even more challenging, many investors are hitting funding brakes and telling CFOs having a Plan B won’t cut it either. Companies need Plans C, D, and even Z in place to stay nimble and move as quickly as the market changes. High growth may be replaced by resilience as the more telling indicator of smart strategy over the next few years, and resilience, we all can agree, is worth investing in.

Why your not-so-glamorous plans could be the ones putting money in the bank.

If fundraising in 2021 revolved around growth at all costs, in 2022 it’s all about growing responsibly. Nearly overnight, terms like “burn rate” and “EBITDA” replaced growth rate multiples as investors focused on judicious spending. By the time my colleagues and I announced our $30 million Series B deal in mid-June, the market was about to close out its worst first half in decades. The reason we fared is because we were able to demonstrate our ability to thrive in various market conditions. Quite simply, granular metrics and due diligence are more important than ever right now. Investors want to know if you’re prepared to weather unforeseeable storms and if you have the cash to last 24 to 36 months vs. the 18 to 24 months that seemed “safe” back in 2021.

From there, you’ll need to demonstrate the depth of your longevity planning. You’ll need to come to investor meetings prepared to speak in detail about financial statements and projections, as well as the story and narrative behind your numbers. You should expect to be quizzed on specifics like cohorted revenue data, go-to-market efficiency, margin and unit economics, net dollar retention, and metrics like the Magic Number and Burn Multiples.

While there are field-tested practices for longevity and fundraising, my recommendation for all startups and scaleups is to plan for the probable and plan twice as much for the outlier scenarios. These plans will naturally need to be tailored to your company, industry, growth stage, the market at large, and other factors, but having a variety of plans is essential.

FP&A: The team behind your plans.

In today’s market, cash and runway are key to survival—and both require quick action and holistic financial planning and analysis (FP&A).

This is no easy feat, and disappointingly, most finance teams lack the basic tools and resources to plan. When markets are performing at an all-time high, this is a challenge. When we consider it in today’s landscape, a time when VCs want Plans A to Z, granular metrics, and best- and worst-case scenario models, startups need more range and versatility to move at the pace required by changing market conditions. That’s exactly why I founded Cube, a spreadsheet-native FP&A solution that helps finance teams move quickly and stay confidently ahead of the pace of business.

Though the fundraising landscape continues to shift beneath our feet, proper planning will help you stave off disaster. While a spring might not be in sight, instituting rigorous planning and adjusting your spend, can get you through this nuclear winter. It’s times like these that create resilient companies, and demonstrating discipline will be rewarded in the long run.

Global Banking & Finance Review


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