A CFO’s Perspective: Financial Strategies in the Current Environment

The startup community is constantly evolving, and the next 12 to 24 months are expected to bring significant changes. CFOs and finance professionals face the challenge of skillfully navigating the present landscape while effectively managing company financial strategies and projections. During this year’s Founder Tactics, Pilot’s annual founder’s summit, Hudson Bova, Principal, CFO Services at Pilot, shared valuable insights to help startups thrive in uncertainty.

Let's look at the key takeaways and insights from Hudson's Founder Tactics session.

Understanding the Current Economic Landscape 

The operating environment that many businesses are currently facing is challenging. Factors such as elevated inflation, supply chain constraints, declining valuations, and venture capital activity have contributed to unique challenges. While the current situation has complexities, a solid understanding of your company's finances and a data-driven approach to operating strategies is crucial.

Examining the Economic Cycle and VC Corrections 

To gain perspective on the current economic cycle, look at historical patterns of venture-backed deal activity. There have been major corrections in the past, such as the dot-com bubble and the global financial crisis. While today's correction fundamentally differs, analyzing historical data can provide insights into the present situation. For example, as of April 2023, we’ve experienced a 45% contraction in venture backed deal activity since January 2022. Compare that to a 47% contraction during the dot.com bubble. It’s worth noting that we are relatively far along in the current correction, approximately 18 months into this cycle, whereas peak-to-trough for the dot.com bubble was 19 months. Being cautiously optimistic is understandable, but there are some notable headwinds we have to consider.

Navigating Cash Runway and Fundraising Challenges 

One of the significant concerns for startups is the length of their cash runway. A notable statistic shared by Hudson during the session was that 44% of VC-backed companies have 12 months of cash runway or less, with 21% having six months or less. With funding activity experiencing a slowdown, businesses should focus on differentiating themselves and resonating with investors to secure their necessary capital. Competition for capital is expected to intensify, so companies need to focus on optimizing key performance indicators. For example, capital efficiency and net retention metrics tend to be top-of-mind for investors in this environment. 

Capital Deployment Timelines and Investor Perspectives

Investors face the challenge of deciding when to invest in a climate of falling valuations and an influx of new investment opportunities. Due diligence processes are becoming more extensive, leading to more extended periods between VC rounds and slower velocity of capital deployment. While a significant amount of dry powder is available for investment, always consider the nuances of the current market dynamics. Timelines and priorities between investors and founders may not align perfectly, emphasizing the need for effective risk management.

Cash Management and Operating Strategies 

Given the current focus on cash runway, businesses are employing various strategies to manage their finances effectively. Cutting travel, marketing, and office space costs has become common practice. Optimizing vendor costs, considering fractional resources for critical functions, and leveraging tools like the 13-week cash flow model are also effective cash management tactics. Startups should scrutinize and benchmark their expenses against the market, explore fractional resource options, and meticulously track cash inflows and outflows.

Preparing for the Future As a CFO

It's important to hope for the best while preparing for the worst. Hudson recommends that you should aim to have enough cash runway to sustain operations until the end of 2024 or adopt cash management strategies that elongate the runway. Planning for fundraising 12 to 18 months in advance is crucial, as positioning your company effectively for future funding becomes paramount.

The Founder Tactic Session provided valuable insights into the startup strategies required to navigate the macro environment successfully. While the challenges are significant, startups can position themselves for growth by adopting efficient operating strategies, managing cash effectively, and focusing on differentiation in the eyes of investors. Your company can overcome obstacles and thrive in the ever-evolving startup landscape by staying proactive and adaptive.