Cash is king in startups. Entrepreneurs usually do not have any in the beginning and struggle to keep it after raising funds. Projects often take longer and cost more than originally planned. The burn rate can is a growing concern and capital raises result in varying degrees of dilution. One way to hurt your investors is raising more funds under duress and having to settle for a bad deal. After all, investors negotiate harder when the company is nearly out of money or when milestones not adequate to justify a higher valuation.
It is usually better to negotiate with investors or prospective business partners when fears of running out of money are lower. Managing the money takes planning if one wants to stretch available funds. Holding on to cash while trying to meet all milestones and timings is complex. Entrepreneurs must try to manage cash reserves and negotiate hard to reach better financing terms before funds run out. There are a few methods of stretching the reserves. None of them is perfect, but they may be better than the alternatives.
1. Use Equity: Equity does have value and used in place of cash or to reduce cash payments helps retain cash reserves. Some providers are able to accept the risk of equity while others are not. Engaging in the dialogue will help identify those with flexibility.
2. Spread Payments: Billings occasionally come in large chunks. Some vendors may allow you to spread payments over time. This helps retain reserves while continuing to develop the business. It may be a problem for the vendor if you spread the payments, but you will not know unless you ask.
3.Negotiate Reduction: Occasionally, approaching a vendor and requesting help or reduction of a bill may pay off. Perhaps you can reduce the current bill or get a portion deferred until much later. Forgiveness of portions of a bill is always welcome.
4.Adjust Timeline: Running a project often includes several steps taking place in parallel. When money is tight, perhaps a slower development utilizing a serial approach will allow for spreading the cash out. You may miss timings, but your ability to hold on to cash may benefit negotiations with partners or investors.
5.Hold Off: Holding off payments is risky, but sometimes works. Vendors can get angry and take steps to recover what is due. Sometimes, they will wait a while. It is a gamble, but may be one to have to consider.
6. Raise Capital: It is always better to raise capital when you are not desperate. Your negotiations are better and your stress level is lower. Retaining the ability to say NO to a bad deal is important!