Not so very long ago, investors were thrilled about the opportunities tech presented to them. Everyone was on the hunt for the next unicorn, and founders had ample opportunity to build the runway they needed to get their companies off the ground.
Things have changed, though. As everyone holds their breath waiting for rate cuts, many startup founders report that investors seem to be pickier.
As a result, early-stage founders need to deploy a strong financial strategy, and then diligently manage it as they move forward. The days of plenty of cushion for burn rate are likely behind us — at least for now. That’s why we recommend keeping one word in mind as you develop your financial strategy: lean.
Setting the stage: the current fundraising market
To underscore the importance of a lean financial strategy for early-stage startups in 2024, let’s look at the current fundraising environment.
Last year, you might have expected that investors would be pouring cash into startups in light of all of the excitement surrounding artificial intelligence (AI). Actually, though, Pitchbook data shows that investment saw a steep 30% dropoff between 2022 and 2023. Across the U.S., investors put $242.2 billion into startups in 2022. Last year, that investment total dropped to $170.6 billion.
Global investments saw a similar decline. In 2022, the global venture dollar investment totaled $462 billion. In 2023, that dropped 38% to $285 billion, Crunchbase reports.
In 2024, that trend has continued. In Q2 2024, both the size and the quantity of venture capital funding round deals went down. S&P Global Market Intelligence data reveals that last quarter, global venture capital deal value rang in at $65.4 billion, an 8.3% decrease from Q2 2023. That S&P report includes a chart that clearly shows how private equity and venture capital investments have been trending downward since 2021.
Fortunately for tech startups, the money that is coming in does often get directed toward your sector. Technology, media, and telecommunications companies got almost half of the global venture capital dollars distributed in June 2024.
While tech is getting a large share of the money getting invested, the total dollar amount is shrinking. Clearly, then, the funding environment isn’t what it was a few years ago. And founders need to pivot their early-stage financial strategy accordingly.
Stay lean to survive
Rakesh Shah, an experienced fractional CFO, has one big recommendation for startups in light of the current state of startup funding: stay super lean. During the pre-seed and seed stages, he says this is particularly important.
Specifically, he has a few areas where founders should refine their financial strategies.
Getting to the break-even point
Shah recommends focusing on your unit economics so you can break even — or, ideally, get profitable — as soon as possible.
The sooner you can reach that break-even point, the more runway you extend. And in an environment where investors are less inclined to hand out money, that added runway can make all the difference.
Generating cash with the business model
Because the fundraising environment is tight right now, founders can’t rely on investors to float their business in the early years. They need to create a financial strategy that prioritizes generating the cash the company needs — and keeping that money in the business.
Here, Shah emphasizes the importance of paying customers. While free trials and promos can be advantageous, seed-stage companies need to prioritize revenue generation over marketing.
Shah recommends keeping the marketing function lean and low-cost as you prioritize sales and customer retention. Look at where your competition is finding paying customers and use that for inspiration.
Also, take some time to optimize your customer acquisition costs (CACs). If you haven’t tapped any organic (read: free) CAC opportunities, those present an excellent opportunity to generate cash for your company.
Building a bottom-up cash flow forecast
Cash management is especially critical for early-stage startups right now. Since less money is coming in from investors, you need to be diligent in managing each dollar.
You want to be on top of current cash flow and forecasting future cash flow for your company. Ideally, we recommend reconciling your books on a weekly basis to help here.
Shah also suggests creating a bottom-up cash flow forecast. Build the forecast up from the vendor and supplier level so you have a clear grasp of every single expense that’s going out the door. Create your forecast with as much granularity as possible.
Here, applying a 13-week cash flow forecast model can help. This method is traditionally used when money is tight, or even when a company is in a bad financial position. But as a startup, money is tight — and if you don’t diligently manage your cash flow, you could burn through your runway faster than you expect. The 13-week cash flow forecast allows you to plan quarter by quarter, helping your company stay lean to make it through its earliest stages.
How a lean financial strategy helps to win investors
Staying lean and diligent in your financial management and planning doesn’t just slow your burn rate. It can also help you lure investment to your company.
In today’s fundraising environment, investors are picky. If you can pair your good idea with a cash-generating business model, a clear path to your break-even point, and a clearly detailed cash flow forecast, you set yourself up to catch investors’ attention. The more you can demonstrate that you’ve structured your company to make money, the more confidence investors have that they’ll see returns. As a result, a thorough financial strategy that prioritizes staying lean makes a big difference.
If all of this sounds daunting, that’s a sign you’d benefit from the right partner. A fractional CFO helps you get the financial guidance you need in your company’s early stages. Paired with startup accounting expertise from our team, you get a clear understanding of where your money’s going so you can reduce your burn rate and extend your runway.
For help creating a financial strategy that will woo investors while helping your company thrive in its early stages, get in touch.