Securing an equity funding round is a milestone achievement for any startup. However, depending on how quickly a startup raises its next round of funding, the period between funding rounds can pose challenges. Being able to sustain operations between funding rounds is important for any startup, whether through extending runway, generating revenue, or taking advantage of non-dilutive funding options. In this blog, learn more about keeping a startup alive between funding rounds and some strategies for extending runway, generating revenue, or pursuing non-dilutive funding.

Keeping a Startup Alive Between Funding Rounds

If a startup’s runway is too short to reach the next funding round, there are a few strategies that can help keep a startup alive in between funding rounds.

1. Extending Runway

A startup’s runway is an important metric to help assess your startup’s immediate health. Measured as the amount of time your startup can continue operating at its current burn rate before going through all of its cash reserves, is a direct indicator of the time a startup could continue if no unexpected expenses come up and assuming neither additional funding or capital injection occurs.

In order to calculate runway:

Net Burn Rate = Monthly Operating Expenses – Monthly Revenue

Cash Runway (in months) = Current Cash Balance / Net Burn Rate

A longer runway can provide a startup the flexibility to help mitigate market fluctuations, make adjustments to products/services, and negotiate a startup’s next equity funding round.  Extending runway can require a disciplined approach: cost management and operational efficiency.

Strategic Cost Management

Startups should scrutinize every expense with a focus on preserving their current capital. Strategically prioritize what costs are most important and which could be cut or even deferred temporarily.

• Staffing Optimization: Implementing a hiring freeze on non-essential role or considering contract or part-time employees for essential hiring may help with strategic cost management.
• Operational Overhead: Renegotiating contracts with suppliers and vendors or switching to more cost-effective software providers may help cut costs.
• Capital Expenditures: Postponing non-essential capital investments and prioritizing only the necessary can help maintain core operations while managing costs.

Enhancing Operational Efficiency

Enhancing a startup’s efficiency can help extend runway by allowing for every dollar spent to yield maximum output.

• Process Automation: Identifying and automating repetitive time-consuming tasks can help improve speed and free up human labor to focus on higher-value initiatives.
• Agile Goal Setting: Recalibrating milestones to be achievable within a constrained budget can help maintain team morale and demonstrate to future investors that a startup can executive effectively under fiscal discipline.

2. Proactive Revenue Growth

One important way to keeping a startup alive between funding rounds is plainly: generating additional revenue to extend startup runway. Generating and growing revenue can be an offensive strategy to strengthen a startup’s runway in between funding rounds helping to reduce reliance on external capital.

• Leverage Existing Assets: If a startup possesses proprietary data, technology, or expertise, licensing it to non-competing businesses can add an additional source of revenue
• Strategic Pilots: For B2B startups, paid pilot programs with potential enterprise clients can help validate demand, provide cash flow, and potentially even lead to a long term relationship

3. Non-Dilutive Capital

If extending startup runway is unachievable in between funding rounds, a startup may pursue non-dilutive capital sources in order to increase cash reserves while preserving equity. Non-dilutive funding can be any capital that is raised without giving up ownership or equity in the startup. It is primarily debt-based or grant-based and may come with repayment obligations.

• Venture Debt: Used to extend runway and finance growth initiatives, venture debt is a loan that has associated repayment terms.
• Alternative Debt Financing: Offered by specialized technology lenders, this form of non-dilutive capital is tailored to startups. They may focus on financial metrics like recurring revenue and are often more flexible than traditional bank loans.
• Revenue-Based Financing: In this form of non-dilutive capital, funds are provided in exchange for a fixed percentage of future monthly revenues until a predetermined cap is repaid. This aligns repayment with business performance rather than a specific date, avoiding fixed monthly payments that may strain cash flow in the future.
• Government Grants: Non-repayable funds, often from public bodies, can help support research and development, particularly in sectors like biotech, climate tech, and health tech. These funds are highly competitive and typically come with usage requirements for the funds.

Key Considerations for Between Funding Rounds

Navigating the time between funding rounds can require a wholehearted assessment of a startup’s position and a disciplined communication strategy.

• Transparent Investor Communication: Founders should maintain clear lines of communication with investors in between funding rounds if cash reserves are constrained. A transparent discussion about challenges and strategies to assess them can help build trust and may even bring forth innovative ideas on extending runway or provide connections to non-dilutive funding sources.
• Diversified Capital Stack: Startups may want to consider building a diversified capital stack to reduce reliance on one form of capital raises. Relying solely on venture capital can create vulnerability, especially if a period of decreased venture capital investment occurs. A blend of equity, debt, and grant funding can help a startup maintain the cash reserves needed to grow in times of uncertainty.

Final Thoughts

Keeping a startup alive between funding rounds is important and the time between can be a test of a founder’s operational discipline and strategic foresight. Taking an active approach of extending runway through cost efficiency, growing revenue, or strategically deploying non-dilutive capital can help a startup survive between funding rounds.

Is your startup ready to raise its next round of funding? Apply today to raise capital with MicroVentures!

Want to learn more about growing a startup? Check out the following MicroVentures blogs to learn more:

• Finding Funding: Bootstrapping vs Fundraising
• What Private Market Investors Look for in a Startup’s First Funding Round
• Financials and Fundraising: Financial Reviews vs. Financial Audits
• Flexibility vs Ownership: Revenue-Based vs Equity Financing

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.