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After years of free-flowing capital, Silicon Valley startups and VCs have a newfound obsession with cash

After years of free-flowing capital, Silicon Valley startups and VCs have a newfound obsession with cash

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Until about three months ago, startups in Silicon Valley gave little thought to a seemingly important business detail: cash.

Money flowed freely in the valley before the coronavirus, and founders and venture capitalists didn’t much worry about how much cash companies had on hand. “In the pre-COVID environment … if you don’t get a [funding] term sheet in a month, there’s probably something wrong with the company,” Matt Murphy, a partner with Menlo Ventures, told Business Insider.

Things were so good for startups that investors often sought out founders before the latter were even looking to raise capital, he said, adding, “that’s all changed now.”

Suddenly cash is king, as the frightening reality of a slowing economy has caused the commodity’s value on a balance sheet to appreciate considerably in the eyes of both startups and their VC backers.

In an effort to control the pandemic, governments around the world limited their citizen’s movements, which in turn throttled economic activity. Consumers have cut their spending. With their revenue drying up, many companies have cut their budgets and workforces.

While many venture firms had uninvested capital in their funds before the onset of the crisis, many have been trying to conserve that cash, both to buoy their existing startups and to invest in new ones. To ensure that their portfolio companies survive the crisis, many VC firms have been pressing those startups to figure out how to stretch their cash.

The mindset concerning cash has shifted dramatically

Before the downturn, startups typically had less than a year of cash on hand, or maybe 18 months worth at the most, Murphy and other venture investors said. Some companies set up lines of credit or debt that they could tap into if cash ran low because a financing round lasted longer than expected, Murphy said. But venture investors often didn’t set any standards for how much cash startups should have, he said.

“There wasn’t really some magical number there,” he said. “It [was] just like, hey, you could raise money when you’re ready.”

That mindset shifted dramatically as the pandemic took hold in the US and venture investors started to worry about the availability of cash for their companies and what kind of terms those companies might have to accept if they needed to boost their finances, Murphy and other investors said. Some investors told Business Insider they were now requiring the companies to have at least 18 months of cash on hand, or runway in industry parlance. Murphy and others have pressed for them to have even more.

“We typically like to have our companies having 10 to 12 months of runway, because startups tend to raise capital about once a year,” said Blair Garrou, a managing director at Mercury Fund. But in the wake of the crisis, he added, “we really need to have about two years worth of runway.”

Because of all the cash that had been flowing through the startup ecosystem in recent years, many startups had decent amounts of cash on hand, the investors told Business Insider. But they pushed their startups to stretch out that cash as much as possible by cutting expenses. So companies laid off workers in some cases or furloughed them in others. They deferred salaries and cut other expenses. In some cases, they delayed plans for new developing new products.

“We made them go through a process of saying, ‘Hey what makes sense?'” said Jai Das, president and managing partner of Sapphire Ventures. “Do you need all these resources, all these people? How can you get trim expensesand get to the point where you have at least two years of runway, in terms of the burn you have?”

Companies have looked for alternative sources of cash

The investors also pressed their startups to look for sources of additional cash as needed. So some companies tapped existing debt lines or pursued new ones, the venture investors said. Others applied for money from the Paycheck Protection Program, the low-cost loans from the US Small Business Administration that were made available under the $2 trillion coronavirus stimulus package. But many companies ended up not taking those loans because of mixed guidance from the SBA about whether they were eligible and fears over potential legal or reputational repercussions, the investors said.

“OK guys you know the situation,” Garrou and his team told their startups. “You lowered your expenses as much as possible, now it’s maximize your cash runway.”

Thus far, the newfound reverence for cash has been successful in stabilizing the startups, the investors said. A few companies in their portfolios have been sold, but none has had to be shut down so far, they said.

“For us, we actually feel we are emerging stronger,” said Dan Malven, a managing director at 4490 Ventures.

Got a tip about startups or the venture capital industry? Contact Troy Wolverton via email at [email protected], message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.

SEE ALSO: Silicon Valley VCs have a new obsession that perfectly captures the grave danger facing startups : How long is your ‘runway’?

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