I have good news and bad news for entrepreneurs.
During the fourth quarter of 2015 there was a drop in "founding dollars" globally for startups. According to CB Insights, it was a fairly significant decrease of 30% when compared quarter-over-quarter - which was the lowest since Q1'13. The beginning of 2016 isn't looking like there is any more money going into startups.
Now that the bad news is out the way, it's time for some good news. CB Insights states that "funding to VC-backed companies has been on a steady climb over the past five years." In fact, "Between 2011 to 2015 the funding to VC-backed companies globally went from $49B to over $128B." That's an impressive 162% increase.
But, that doesn't necessarily mean that we're completely out into the clear.
One factor that could impact startup founding is the Federal Reserve's quarter-point rate increase. As Rolfe Winkler explains in the Wall Street Journal, if this continues, we can expect "a 'gradual' tightening and fund managers expect several more hikes over the next 12 months-the tide of capital could rush out of Silicon Valley more quickly, leaving plenty of companies short of cash before proving they can be profitable."
Combine that with the fact that Silicon Valley's hype machine has begin "to sputter after helping companies achieve valuations ahead of their business fundamentals," and we could be heading into a crunch. We see examples of this with the recent Square IPO and a few others.
Regardless of what happens, you can ensure that you and your startup can ride the dreaded-crunch wave and survive by taking the following precautionary measures.
Don't Quit Your Day Job Just Yet
If you're still waking-up every morning and going to your day-job, then consider hanging around there for a bit longer. You can work on your start-up whenever you have free time, like on the nights and weekends. It may take longer to get your startup launched, but at least you'll still be able to generate an income until your business takes off.
If you're working at your startup full-time, then you can always make some extra cash by hustling on the side. Whether it's freelancing, bartending, providing tech support, or driving for Uber, there are more than side gigs you can do until your business brings in revenue.
Look For Alternative Funding Options
You don't have to just rely on VC or Angel Funding to keep your business afloat. At this point, you probably don't even have to secure a loan from your bank or max-out your credit card. There are multiple ways that you can find funding for your startup until it's ready to move to the next stage. I personally have invested in new crowdfunding company DreamFunded. Crowdfunding is the future of funding and companies like DreamFunded are great ways to get your company funds.
Next, you can go with the traditional bootstrapping and self-funding approach which means that you accumulate some resources before moving forward. You can also ask your friends or family for a loan, start a crowdfunding company on Kickstarter, or apply for grants or enter a contest for early stage startups. I personally have done this with my own eCash company over the past year. This is one of the best ways I've been able to retain my equity and grow my company sustainably.
If that's not enough, checkout loans on peer-to-peer lending sites like Lending Tree or join a startup incubator.
Don't panic and have a firesale. You just need to start trimming the fat a little. This could include anything - like cutting back on overtime, reduce the hours for nonexempt employees, and cut the salaries for you and your cofounders. I like to cut funding towards anything that isn't driving revenue in the next 2-3 months.
These suggestions may not be easy decisions to follow, but it's a better option that shutting down your startup completely. Make sure that you keep cutting costs until you're profitable.
Delay Capital Spending and Reduce Working Capital
During crunch time you need to focus on pumping money back into your business to keep afloat. For example, instead of purchasing a new building, office, or equipment, make sure that you've paid your employees.
Speaking of capital, make sure that you collect what is owed to your business. Collect these funds as soon as possible so that you can put it back into the business. Even if collecting funds means offering a discount on an invoice, having some sort of cash flow is better than nothing.
Explore Short Term Revenue Gains
While you should be focused on long-term goals, don't rule out any ways that you can quickly start driving revenue. For example, consider raising prices, selling more products to your best customers, or looking for customers that would be willing to pay you for developing a product.
Ask For Concessions
Doug and Polly White, Principals at Whitestone Partners, Inc., suggest on Entrepreneur that:
"If you have been assessed fees, penalties or interest, ask that they be waived. Request extended terms. Don't hide from creditors. They will often be willing to work with you if you communicate with them -- particularly if they think that the alternative to working with you is that they get paid nothing when you declare bankruptcy."
Scale at the Right Time
Startups are designed to grow quickly. But, if you scale too quickly, you'll be heading down the wrong path. The YEC suggests on ReadWrite that you keep on eye out for the following signs:
Save While You Can
Ted Schlein, general partner at Kleiner Perkins Caufield & Byers, recommends on TechCrunch that:
"Here is a budgeting secret: Assume that the money raised today is all the money that will be needed to build a business that will scale (even in times when capital isn't available). It's good to drill a sense of fiscal discipline and challenge assumptions about spending on aspects such as sales, marketing, and engineers."
Get Outside of the Valley
I love living and working in Silicon Valley. While it's an excellent location to launch a startup, it's not the only spot in the world to be an entrepreneur. In fact, it may even be in your best interest to start a business somewhere outside of Silicon Valley to avoid the crunch.
Depending on your industry, you may want to consider relocating to other markets where competition isn't as stiff, but where there are still plenty of resources and favorable breaks for small businesses. New York, Boston, Chicago, Seattle, London, Tel Aviv, and Berlin are all major cities that have a solid startup scene. But, there are also smaller cities like Austin, Nashville, Asheville, Boulder, and Jalisco, Mexico which are also worth consideration.
There are numerous ways to be flexible. For example, if your business wasn't originally designed to earn profits over the long-term, and you had wanted to grow quickly, then you may need to reevaluate your business model and transform into a business that grows organically.
Being flexible also means that you adapt to market changes, the needs of your customers, and that you remain open to new ideas. These decisions will ultimately mean that you may have to pivot until you find a business plan that works. Android originally began as a tech company that created operating systems for cameras, but finally pivoted to a business that focused on mobile handsets.
Have an Exit Strategy in Place
This is a touchy subject, but it's never too early to start planning your startup's exit strategy. David Drake, Chairman at LDJ Capital, says in the Huffington Post that investors typically look at the following six exit strategies;
And, if all else fails, you may be forced to liquidate all of you assets and close your doors. But, don't be to hasty with this final move. Many businesses have survived severe crunches and come out ahead. Good decisions, good planning, tightening your belt, looking for a pivot strategy and a high level of good work can save a business.