Running out of money (YC)

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This blog post, authored by Dalton Caldwell, offers vital advice for startups facing a critical situation with less than a year of runway. He offers key points to pay attention to.
Published/Updated on Jul 21, 2021

Blogpost - Advice for Companies with less than 1 year of Runway

By Dalton Caldwell, Director, Architect and Group Partner at YC. He was the cofounder and CEO of imeem (acquired by MySpace in 2009), and the cofounder and CEO of App.net.

Advice for Companies With Less Than 1 Year of Runway

Key Points

  • The hardest part of dealing with a low runway situation is managing your own psychology. You have to simultaneously manage your own anxiety to not be overly negative about your prospects, but also not be irrationally positive. It’s a delicate balance.

  • Understand exactly how much cash and runway you have. Before reading further, make sure you have read both The Fatal Pinch and Default Alive or Default Dead.

  • Immediately take actions to become Default Alive: Grow revenue more quickly, cut costs, or both.

Counter-productive ideas

Don’t let these ideas be the justification(s) for why you choose to remain Default Dead.

  • The Fatal Pinch does not apply to me

  • Investors will continue to fund my company if I run out of money

  • If I fail at fundraising I can just sell the company

  • My conversations with potential acquirers or investors are very far along and likely to happen

  • Acquirers won’t buy us if I cut costs

  • My employee morale will plummet if I cut costs

  • New investors won’t fund us if I cut costs

Understand your leverage in a negotiation

  • Delaying taking action to reduce burn is a bad strategy. Make changes to become Default Alive now.

  • From a game theory perspective, an investor or acquirer is best served to stall and drag you along until you have no leverage at all. An opportunistic acquirer or investor is unlikely to say “no” outright, and will keep their options open as you become increasingly desperate.

  • If things looks bleak now and you take no corrective action, it is overwhelmingly likely the situation will get worse, not better.

Some tips on reducing burn

  • Real estate/lease costs are binding agreements and very difficult to get out of.

  • Payroll costs are the most likely source of high burn scenario. Be transparent with your remaining employees and respectful to those fired.

  • Cut PR, marketing, perks, parties

The point of no return (<2 months runway)

  • When you hit the point of no return, you should shut down your company.

  • Do not become insolvent. Pay your debts. You must pay your tax and payroll obligations.

  • In especially messy scenarios you can end up with personal liability. Consult with your lawyers regarding how to do an orderly shutdown.

  • Don’t drag things out and end up in a no upside situation: no upside for you, for your employees, for your investors, or for your customers.

  • Even if things go poorly, behave in a way you would be proud of.