Published January 3rd, 2023
Since September 2022, Europe has entered a new “P&L leading era,” where money no longer flows towards non-essentials.
While we see this as a return to normalcy after a few years of unusual growth, the coming months will be challenging for entrepreneurs with less than a 24-month cash runway.
Here are 4 steps to help founders to get the missing months of runway they need before their next fundraising round.
*This content is an excerpt from the complete playbook created by the XAnge Startup Success Team for our portfolio companies.
Against a backdrop of geopolitical and energy crises, companies’ financing strategies are undergoing a paradigm shift in 2023. You’ll be facing:
Complex activity financing that’s difficult to monitor (persistent supply chain disruptions with impact on the working capital requirement, rising inflation, less visibility on business planning, etc.);
More restrictive and less advantageous access to non-dilutive medium-long-term financing with increasing interest rates;
The start of repayments of PGE loans taken out in 2020 and 2021;
Dilutive financing processes and M&A operations that are also becoming more complex and demanding.
To identify your runway situation, it is first necessary:
Produce a yearly activity budget, including a “normal case” scenario and a “depreciated scenario,” in order to anticipate any cash flow needs that may arise.
Produce a cash flow forecast including key strategic assumptions, to detect any cash flow needs that will have to be addressed in the coming months in advance.
Before making an effort to extend your runway, make sure it’s worth it. A few key P&L-based metrics should be able to tell you if you’re running a promising business.
Are you spending more to acquire new customers than you’re earning in customer revenue?
How to interpret your result:
🟢 >€140k Excellent
🟡 >€100k Good
🟠 >€50k to €100k Needs improvement
🔴 < €50k Danger zone
Are you having difficulty acquiring new customers?
How to interpret your result:
🟢 < 0.5 Excellent
🟡 0.5-1 Good
🟠 1–2 Needs improvement
🔴 > 2 Danger zone
or NRR. Are you attracting and retaining customers?
How to interpret the result?
🟢 >110–120% Excellent
🟡 >100% Good
🟠 90–100% Needs improvement
🔴 <90% Danger zone
*Note that these unit economics are focused on B2B SaaS companies. Make sure to use relevant ones for your business type.
Specific metrics can show your ability to be profitable and predictable in your business ramp-up. Stéphane Azamar-Krier, CEO @ AtScale shares the key Sales metrics to focus on.
Is your Sales Team profitable?
What this calculation means:
If a sales rep costs €80k per year of gross salary, meaning €116k total (adding 45% tax in France), it means that over 12 months, each sales rep should generate €464k of ARR when they are fully ramped.
This is a key financial metric for piloting new sales hires. It’s the number of months a sales rep needs to hit the full-speed ratio.
Below are several solutions for reducing costs based on your runway extension needs. The actions listed below are never simple, but they have to be undertaken when critical for the company’s future.
Deciding to shut down a business unit is never easy. Here are some key questions to ask yourself before doing it:
Being unprofitable does not necessarily mean that all customer and/or product segments are unprofitable. Therefore, it’s important to determine which segments are profitable and calculate their profitability. Then you can decide to stop serving the segments where you’re experiencing the most losses.
This means no longer signing similar new contracts, and potentially terminating current contracts. Before cutting off a client, always try to increase the selling price. You can also set a minimum price below which you refuse to sell, or negotiate with your customer for a business contribution.
“At Agicap, at the beginning of 2022, we reached a historic milestone with the launch of 2 new products: a supplier invoice payment solution and a customer payment collection and reminder solution. We could have decided to stop the development of these products to reduce costs. But instead, we increased our investments to accelerate their launch to the market. A few months later, a significant portion of our new MRR in France comes from these 2 products, which greatly increased our average basket.”
– Clément Foltzer, Head of Sales @ Agicap
This is never an easy topic to handle, because people are the heart of your company. But depending on your cash runway and your 1-year vision, you may have to make tough choices.
One option is for your organization to maintain the current team by freezing hiring but continuing to replace turnover. Or, if there’s no other choice, you can downsize the workforce. Before taking action, here’s some advice to help you pin down the best option:
Don’t think short term
Company reorganization is often overlooked by startup founders. It involves fundamentally reconsidering how your team will operate for the next year or longer. Implementing changes takes time, particularly if layoffs are involved.
Analyze what works and what doesn’t in the current organization
It’s important to realize that the situation that prompted the desire for reorganization is a consequence of your current state and its dysfunctionality.
Don’t remove positions you may need later
The risk in removing a function is that you may need it again in six months to execute your strategy. Rehiring will take time, money, and a ramp-up period. Therefore, consider reallocating functions before removing them if you anticipate needing them again in the near future.
Respect the Span of Control:
The Span of Control is the ratio of employees reporting directly to a manager. In a changing organization, you may need to alter your managerial relationships. A good average for a span of control is between 5-7, although it can be much larger for some teams (including engineering, and customer success).
Maintaining your people costs means that you freeze hiring but continue to replace employee turnover. As tech startup turnover is pretty high compared to other industries, this means you still have talent acquisition work to do. Check out our “Still Hiring?” section to get tips on hiring.
You can take advantage of this slower hiring period to have your HR team work on key topics such as retention, career paths, or training policy. Check out our article here on tribes to learn how to structure your HR team.
This is the hard part. Downsizing your workforce means that you don’t renew hires after trial periods or short terms contracts, you don’t replace turnover, and, ultimately, you implement layoffs or a reduction in force. It’s important to first think about whether a person can be transfered to another department. Layoffs should be considered when positions are not needed anymore.
This is particularly important during this difficult time in your employees’ journey with your company. Sharing resources to help them find new professional opportunities, such as jobs or training, will make it easier for them to move on.
Here, you’ll find all the relevant XAnge resources that can be shared with departing employees:
In 2022, compensation skyrocketed and the balance of power shifted to favor employees rather than companies. This downturn and market uncertainty could be an opportunity for startups that are still hiring to attract laid-off talent with great potential.
We’ve seen a lot of layoffs in Big Tech and scale-ups. It can be hard to determine why certain employees were let go, and whether or not they were high performers.
Here’s a way of navigating this newly available talent market (but not a definitive rule):
Usually, offices are the 2nd cost item of a company’s P&L. In addition, allowable rent increases are getting higher (from 2 to 3% to 6 to 8% in 2023). It’s time to optimize rent with maximum profitability.
“Today, most of companies implement lower ratios of employee/available seat. Coworking spaces now provide 1.2 badges per seat because they also have large additional spaces where people can work without occupying a private office.” – According to Jérome Justin, CEO @ IVAL
Use this tool made by Ubiq to calculate the space you need according to your growth plan.
→ Do you have a higher rent than market practice? If so, you can easily negotiate with your lender. Paris Centre is still in demand because many companies prefer to rent smaller but central offices rather than larger ones in the suburbs.
However, some landlords prefer to secure against rental risk in exchange for a lower yield… In other words, if you commit for several years, you may find space even in a tight area.
→ Did your lender made any mistakes? 40% of leases have anomalies. If an error is committed, such as error in the indexation of the rent, re-invoicing of charges not provided for in the lease, etc., then it might be possible to recover the cash over 5 years.
If you have too much space or too many seats, don’t hesitate to sublease seats. There are plenty of companies looking for offices for few months. Be careful, though: this can be difficult to manage if your work requires privacy, or if you make developers and sales cold callers sit next to each other…
Even if the coworking space cost is higher, it can be more profitable over 3 years depending on staff variation. In a traditional lease, if the headcount grows dramatically, you have to move to new offices and this generates a lot of CAPEX (refurbishment, decoration, moving costs, etc.), whereas a coworking space will give you access to additional offices as the business grows. This shift typically occurs around 4 years. Therefore, it’s important to consider this duration when signing a traditional 3/6/9-year lease. Predictability of staff and work modes that allow for densification of spaces are the two key points to consider.
WeWork, Myflexoffice, Deskeo, Morning, Gustave Collection, Wojo, Spaces, Newton Offices… They’re all developing new coworking spaces. Check the newest ones, the price will be more attractive. Example: wework.highspot.com
We don’t recommend it unless this is your last resort. Expectations about offices have increased sharply, and they should offer a unique experience that can’t be replicated remotely. The office is expected to provide an environment that supports the wellbeing and productivity of employees in the best way possible.
“Geographic location is a key factor in recruiting and retaining talent, which is why companies prefer to take less office space, but a more central one and with additional services.”
– Arnaud Paquet, Real Estate Fund Manager @ AXA Investment Management
Did you know that SaaS pricing inflation is growing 4x faster than market inflation? Between 2010 and 2020, global annual SaaS spending increased from $13b to $157b.
SaaS spending increased by 26% following the first lockdown in 2020, and continued to grow in the years since.
90% of SaaS buyers overpay by an average of 20-30% a year. With $1 in every $8 going to SaaS in a modern organization, paying the right price for software could easily extend your runway by a few months.
In addition to stack cost reduction, and depending on your business, you can try to reduce your main providers’ costs.
In 2022, companies faced an explosion in payment delays, increasing from an average of 11 days in 2021 to 17 days. Client payments are not in the control of sales reps. Hence, the Cash Collection team should be on top of this topic. If your company is small, it’s the CFO’s responsibility to do cash collection.
Some advice for your sales team:
“Unpaid invoices are much more devastating than you may think. If you have a 5% profit margin, which is fine for an average French company, then for a €10,000 non-payment you will need to make €200,000 in compensatory turnover just to come back to your initial situation. Your time is much more profitable collecting your unpaid invoices than trying to create new revenue.”
Head of Sales @Agicap
Part of XAnge Partnership Program
Factoring is a short-term financing technique for B2B companies that consists in selling their invoices to a Factor in exchange for direct access to invoice amounts, minus factor fees. The factoring service includes: Invoice financing, Credit Insurance (and creditworthiness information), and Recovery service.
The French Factoring market more than doubled between 2012 and 2022, settling at €380 billion.
Is factoring compatible with your business?
Prefinancing your “CIR” (Crédit d’impôt recherche and Crédit d’impôt innovation) is an advance payment of the research tax credit already declared (CIR of year n-1 or earlier) or in the process of being established (CIR of the year in progress). It allows companies to earn 6 to 12 months of cash flow.
Is CIR financing compatible with your business?
Revenue–Based Financing (RBF) is a debt method that involves receiving a cash advance on anticipated future revenue. It’s a complement to equity money and bank debt.
The European RBF market has grown rapidly since 2019. In the first quarter of 2022, RBF European fintech startups raised 220 million dollars, including Silvr’s successful fundraising of 130 million euros.
Is Revenue-Based Financing compatible with your business?
“In a turbulent financing ecosystem, leveraging the best solutions for your cash flow is mandatory. Maximizing each source of financing must be done to address the various cost items you have. Revenue-based financing becomes a structural partner of your business alongside bank debt and equity.”
Strategic Partnerships Manager @ Silvr
XAnge Portfolio Company
This playbook has been created with the help of experts, partners and portfolio companies.