July 28, 2022

How Series A founders can approach burn in today’s downturn

[object Object] How Series A founders can approach burn in today’s downturn

For founders that are around the Series A stage, managing burn is top of mind, especially in the current market.

To tackle this topic, our own Jason Garcia (VP of Capital, Mercury) joined Nanxi Liu (co-founder & co-CEO, Blaze) and Elizabeth Varley (founder & former CEO, TechHub) in a virtual discussion about Planning for burn in a downturn.

Here are some of our key takeaways:

  • Know your financial metrics, but don’t be afraid to call in experts.
  • Good talent is always worth investing in, no matter the environment.
  • Prioritize refining your organizational processes and culture.

Watch the full recording here:

Burn rate — Elizabeth admits it's an “evocative” term. For most companies, it’s also a natural consideration on the road to profitability, a measure of how much and how quickly cash flows out of their bank account to cover expenses. The available cash hinges on existing funding and revenue.

Indeed, cash makes the world go around. But now that we’re seeing smaller raises, lower valuations, and fewer IPOs, many founders are wondering how to adjust their projections. Until recently, the rule of thumb was to raise every 12 months before your Series A and every 18 months thereafter, explained Elizabeth. In light of ongoing market corrections, companies should now expect to start raising money sooner — by at least three months — and for this process to take longer.

Investors are also taking a more cautious approach by placing greater emphasis on regular financial metrics. Nanxi has noticed a shift in the conversations she’s been having with her own investors. There are more direct questions about time horizons, run rates, and fundraising goals — and they’re being asked more often because limited partners (LPs) are pushing for monthly updates.

To make sure these answers are on hand, it’s vital to have excellent bookkeepers, whether they’re in-house or external, said Nanxi. These key players should have the skills to present your company’s monthly cash position, profit and loss (P&L), and balance sheet, as well as the expertise to model the relevant insights.

Similarly, Elizabeth encourages founders without a finance background to find a senior strategic team member that does. This individual should have a holistic sense of your business goals over time as well as the appropriate discretion to help you sniff out where costs can be trimmed. For example, they might evaluate how competitive your company’s pricing is or analyze ways you can boost your customer profitability.

While financial advisors can be crucial, founders need to have a solid understanding of their own numbers, line by line. On this, Nanxi commented: “I always say, the founders know the business best. And if they don't, they should.” When it comes to speaking with investors, she says, it’s about keeping an open line of communication and sharing your thought process, especially when you disagree. “[Maybe] they're seeing something you aren't or you're seeing something that they're not.”

Quote by Nanxi Liu (co-CEO and co-founder of Blaze)

In times like these when funding is tight, what’s worth spending on? Nanxi says that companies should feel comfortable paying for marketing spends that have previously generated positive ROIs. Good talent is also always worth investing in, no matter the environment.

Internally, Elizabeth recommends that founders do the work to “understand what motivates the people in your team, especially the best performers . . . because it might not be just around money; [. . .] help them feel included in whatever is going on.” Sometimes it’s about conveying nuance, Nanxi added, like making it clear to your engineering team that the goal isn’t for them to work more hours, but rather to fix procedures so that their jobs are easier.

It’s easy to make the mistake of conflating more headcount with more growth. Nanxi believes that “leaders that don’t know what they’re doing will throw bodies to try to solve the problem.” Instead, companies should instill a culture of accountability so that mistakes are minimized and people feel empowered to produce quality work — right from the start. Back in 2015, Nanxi’s own company was running out of runway and could no longer afford to scale its already-large technical support team. Although support was a core value-add of their business, they realized that they could leverage automation to uphold the high standard their customers expected without unnecessarily growing the team.

Elizabeth ended on a hopeful note about shutting out the noise: “I think it's very easy to become too conscious about the broader economic environment, [. . .] [but] the best time to do anything is always now. [. . .] [The] most important . . . factor . . . is you, [the] founder. And great founders can always make great businesses.”

We’re always looking for more ways to support founders. If you’re interested in fundraising support as a Series A company, keep an eye out for the next round of Mercury Raise Series A. To start connecting with investors directly, head to our Investor DB. To explore more financing options, take a look at our Venture Debt program.