How to think about runway and funding when the venture capital markets are tough

Entrepreneurship has never been easy, and with the backdrop of a tough economic landscape plus a year on year slowdown of venture funding, the challenges for entrepreneurs can mount up. So, what's the best way to think about runway and funding when the venture capital markets are tough? Read on to find out.

How to think about runway and funding when the venture capital markets are tough

Joe Seager-Dupuy / Insight / 16 Nov 2022

Being an entrepreneur has never been easy. But right now – with soaring inflation, supply chain difficulties, strikes and interest rates at their highest level for 14 years – there’s added pressure. If moreover, you’re also looking for venture capital (VC) funding, the road ahead gets rockier.

Global VC funding has dropped sharply, and the gloomy economic backdrop makes it even more important to plan carefully for when – and how much – to raise. So, how should you think about runway and funding when the VC markets are tough?

The current climate

We’re facing a ‘perfect storm’ for consumers and businesses across the world. A resurgence of inflation, geopolitical instability, the tail end of a public health crisis, ongoing supply chain issues, widespread strikes and rising interest rates globally are contributing to complex and compounding conditions for the global economy.

Year on year, VC funding has been in rapid decline across North America and Europe (October was down 45% for Pre-Seed to Series A. Source: S&P Global Capital IQ data). We’re seeing mass layoffs at some of the best-known names in tech. From Stripe and Twitter to Chime and OpenDoor, more than 750 companies have collectively laid off more than 100,000 employees so far in 2022.

On top of this, the VC industry is working through a bit of an identity crisis. A debate is ongoing around what ‘good’ looks like, and how to manage the trade-off of growth vs. profitability.

One school of thought – seeing the pullback in stock prices of cash-burning public tech companies – is guiding entrepreneurs to prioritise profitability and cash preservation over growth. Another school of thought says VC is all about outliers and that the most ambitious and fastest growing companies will continue to find capital amongst the ~$290bn of ‘dry powder’ sitting in VC funds’ coffers in the US alone. Neither viewpoint is ‘wrong’, but there’s a lot of grey in between.

So, what does this mean for entrepreneurs?

Focus on milestones, not absolute numbers

The primary purpose of VC funding, particularly at the early stages, is to give entrepreneurs time and resources to prove or disprove their core hypotheses and achieve milestones that grow investors’ conviction.

In this context, anchoring to the absolute numbers of valuations and round sizes from days gone by is pointless. Recent years have not been ‘normal’ by historical standards for VC funding, and the faster entrepreneurs adapt to the changing landscape, the better positioned they will be to survive in the short term and thrive in the long term. Overthinking the 'headlines’ and letting ego get in the way of ensuring your business is suitably funded is a dangerous path. 

Instead, focus on developing a clear view of the most important milestones, and give yourself enough ‘runway’, or cash in the bank, to prove them. Within this, realism on how long things take and how much they cost is key.

As a rule of thumb, shoot for at least 12-24 months of runway, ideally towards the upper end of that range. Less than 12 months is tight – particularly given the uncertainty right now – and leaves little room for error. On the flip side, much more than two years may lead to over-dilution, as you are selling more of your company at a lower valuation than you may be able to achieve once progress has been made. Speak to your existing investors to help figure out what feels right.

Plan ahead to raise from a position of strength

The worst-case scenario for any entrepreneur is a scramble to raise funding last minute, which in the best case, may result in a dilutive rescue financing, and in the worst case, game over. Having few options leaves you with little leverage to negotiate a good deal for yourself. The good news is that careful planning can give you the best chance of being well-placed to raise from a position of strength.

Firstly, if you have them, speak to your existing investors. Having transparent, early conversations around their willingness and capacity to reinvest will give you a good starting point from which to work out your options (e.g., an internal ‘bridge’ round or an external fundraise) and plan ahead. Lean on your existing investors to open their networks to help find new investors if needed.

Secondly, give yourself plenty of time to adapt. Assume everything will be harder and take longer than it has in the last couple of years. Start your fundraise process well in advance, six months at least, of your projected ‘cash out’ date.

Finally, avoid relying on heroic assumptions in your business plan when working out how long you have before you need to raise. Run sensitivities on your financial model to ensure you aren’t caught off guard in a ‘downside’ or ‘worst case’ scenario.

At True, we’re encouraging our entrepreneurs to be ‘eyes-wide-open’ to the significant challenges and uncertainty right now and to be transparent with us and other investors on the risks their companies are facing. We back founders with huge ambitions and long-term visions that will define the future of the consumer industry. But pragmatism is needed to ride through challenging times. As the sage of Omaha, Warren Buffett, has said: 'In order to succeed you must first survive.

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