As the post-pandemic period loses its heady days, the fundraising climate has become more challenging for startups in the US. The median cash runway length has decreased from sixteen months in Q4 2021 to just over twelve months in Q4 2022, affecting pre-profit startups. The pinch is particularly felt in hardware-intensive frontier tech, while other verticals are also feeling the heat. In this environment, startups need to be creative to reduce their burn rate and extend their runway. In this article, we will explore five ways founders are rethinking their burn rate in 2023.
- Rethinking Office Space
For years, having a centralized office space has been the cornerstone of startup culture. However, the cost of rent, utilities, supplies, cleaning, and coffee delivery can quickly add up. Moreover, signing a long-term lease can limit the flexibility of young companies. Founders are now rethinking the need for an office space and considering remote working arrangements, which can save them money and provide greater flexibility. Investors are looking more for budgetary fundamentals than a fancy workspace.
- Getting Flexible with Staffing
Recruiting, hiring, and training a full-time employee can be expensive, especially if they leave within a short time. Founders are finding alternative ways to reduce their burn rate, such as hiring executive-level talent on a part-time basis through services like Bolster or hiring remote developers in South America, where time zones are not far off from those in the US. Such arrangements offer cost savings and greater flexibility.
- Finding Alternative Sources of Funding
Startups can reduce their burn rate by increasing the amount of cash on hand. Founders are looking for alternative and non-dilutive sources of funding, such as grants, philanthropic projects, and government initiatives that provide access to capital or loans. For startups focusing on products or industries with various government grant opportunities, it’s a great time to scale up grant writing capacity to increase hit rates.
- Reconsidering Ad Spend
Cutting advertising spend should not be a knee-jerk reaction for startups. In 2023, VCs are looking to invest in businesses that show traction metrics like revenue, customer retention, and expected lifetime value. Startups that have amazing technologies but are pre-revenue will find it difficult to attract investors. Therefore, if ad spend is showing a return on investment, even if it’s a small number of new customers, it’s worth continuing it. A small return on investment demonstrates traction that can be scaled up.
- Pushing for an MVP Sooner Rather Than Later
Instead of spending three months fundraising, founders are cutting their expenses to the bone and trying to bootstrap their way to a minimum viable product (MVP) as soon as possible, even better if it’s monetizable. With the “growth at all costs, figure out monetization later” mindset now a distant memory, it may be easier to raise funds by pitching a product that is already making some money, even if it’s a modest amount.
Table 1. Five Ways Founders Are Rethinking Their Burn Rate
| Ways to Rethink Burn Rate | Description |
|---|---|
| Rethinking Office Space | Founders are considering remote working arrangements to save money and provide greater flexibility. |
| Getting Flexible with Staffing | Founders are finding alternative ways to reduce their burn rate, such as hiring executive-level talent on a part-time basis or hiring remote developers. |
| Finding Alternative Sources of Funding | Startups are looking for alternative and non-dilutive sources of funding, such as grants, philanthropic projects, and government initiatives that provide access to capital or loans. |
| Reconsidering Ad Spend | Startups are cutting advertising spend only if their ads are not delivering new clicks or customers. A small return on investment demonstrates traction that can be scaled up. |
| Pushing for an MVP Sooner Rather Than Later | Founders are cutting expenses and trying to bootstrap their way to a minimum viable product as soon as possible, even better if it’s monetizable. |
By rethinking their burn rate, startups can stay afloat amid a tough fundraising climate. While the specific ways to reduce burn rate depend on the unique circumstances within each business, it’s worthwhile to invest the time to carefully evaluate which cost-cutting or runway-boosting methods will be most effective. Startups can benefit from having a financial partner with experience in the innovation economy to help them manage expenses and build their company in a smart, durable way.
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