One of the biggest challenges for any startup, at the moment, is runway. Recent turbulence has seen investor recommendations on runway go from 6-9 months minimum, to 24 months minimum. And with the golden era of high valuations and frequent funding round announcements now looking to be over, founders are facing a far tougher battle to secure VC funding in future.
Even the highest-growth SaaS startups are recalibrating their financial planning. Many are having to make difficult decisions on staffing and growth plans to meet the runway demands of this new era. But having to curtail growth in exchange for safety is not the only way forward: the two need not be mutually exclusive.
All founders, economic crunch or no, should have an intimate and ongoing knowledge of their Customer Acquisition Cost (CAC). Knowing how much your organization spends to acquire a customer, usually via costs like sales and marketing spend, is a vital business metric.
But in this downturn, approaching your CAC differently could be an important tool in extending your runway. How? Take your own SaaS business as an example. Do you have a sense for roughly what share of your expenses or burn rate is tied up in GTM spend, or working capital?
Benchmarking data shows that typically, top performing SaaS companies spend 40-50% of their ARR on Sales and Marketing. With so much of a business’ cost base tied up in GTM efforts and CAC spend every month, it’s clear that making intelligent decisions here can have a huge impact on the business as a whole.
What if you could finance your GTM spend? In essence, doing so could allow you to cut your burn in half and double your runway. Furthermore, in an economic situation that has forced many businesses to clip their own wings, a start-up that can forge ahead with growth plans will win an outsize advantage.
How can CAC financing play a role?
CAC is where you tend to have the most predictability in your business, with respect to return on investment. So, many of the SaaS businesses we work with use revenue-based financing, like ours, as a working capital line to finance that predictable GTM motion. This kind of CAC financing lets founders inject an exact amount of capital on a monthly basis to cover their CAC costs, and align the repayment term with their CAC payback time to minimize the fee.
This can typically alleviate up to 50% of cash drag, allowing you to do one of three things:
- Invest more into growth, i.e. double GTM investment with zero cash flow impact,
- Shift that spend to something else, i.e. product development, market expansion etc.
- Extend your runway to your desired minimum
So even if you are taking other measures across your business to increase your runway, you can use CAC financing to free up capital, to reinstate the growth initiatives and expansion plans you had to cut.
Or you can look at purely as a means to extend your runway today, to have the minimum required for your own peace of mind and to stand out to investors.
One example of a customer that did this prior to the downturn, was Lawtrades.
- By injecting CAC financing on a monthly basis, they reduced the cash drag on the business almost fully, and unlocked full freedom in how to manage their existing cash and runway.
- This led to being able to 3x their ARR with zero cash burn over a year, by unlocking cash flow neutral growth
In the current market conditions, Lawtrades is focusing on growing sustainably by funding growth with Capchase, using this monthly financing to put them in the best position with regards to runway.
Using CAC financing as a runway extension hack
At a basic level, CAC financing alleviates a large part of a business’ working capital needs for more optionality.
Look at this through the filter of your business again. If GTM spend represents 50% of your burn, financing it fully can 2x your runway or available capital for investment. If it’s 75%, you can 4x your runway.
And the earlier you start, the more capital you free up. The impact of doubling your runway is twice as big if your runway is 6 months, rather than 3 months. Said another way, for every month you burn, you’re missing out on 2-4x the opportunity to free up that capital.
Why should you think of non-dilutive financing for your CAC costs
Not all capital is equal. Even if you were able to secure a VC injection in this climate, burning through VC investment is significantly more expensive than non-dilutive financing. Revenue-based financing is also up to 50% more cost efficient than venture debt. Founders also tend to favor revenue-based financing for this because having a flexible, monthly adjustable source of capital is the best pairing for monthly CAC costs, rather than one large lump sum. It means they only pay for what they use, rather than expending extra money on funding that will sit unused in their account for the present moment.
The larger cost risk, though, is one of opportunity. In curtailing your growth to extend your runway enough for safety, what market opportunities could you be missing? A dampened market is easier to capture for those who continue to grow. With enough runway to feel secure, and some capital also freed up to invest in your success, what strategic initiatives would you work on?
