The old saying that ‘cash is king’ is never more accurate than when dealing with a startup. Cash flow is just the fancy term for the money moving in and out of the business every month.
There can be problems with cash flow, especially for first-time founders. No matter how small the company is today, there are more moving financial parts than the founders can manage dynamically in their heads.
How to prepare
To look at things on a high level, half or more of the costs will go to salary.
When I started my first games company and got my first round of funding, which was 90,000 euros, I did lots of mistakes. I had seven full-time game developers on the payroll, with no product ready to ship anytime soon. I didn’t know about budgeting, or about concepts like runway and burnout.
Six months into spending the money, I realized something. There was a point coming up soon where the money would be gone. I was close to killing the company. I had to lay everybody off. The following months were spent on finding more money to keep going. I was lucky and found investors who’d help us to continue to journey. Not everyone will have such luck. What should I have done differently?
#1 Start lean and stay lean
Start with nothing. Get by with begging your way through existence, for a year at least. Contemplate a fancy Ramen Noodles diet. Even when you raise investor money, you shouldn’t feel privileged. Don’t purchase useless gadgets or hire expensive consultants. Don’t get the best office space.
If you jump from a cushy job or freelance role, into a startup founder role, you’ve not been needing to live with an ultra-slim budget. Lifestyle downgrade is not easy. But it will help you to stay above the water.
I know one investor who refused to put any money into a startup if its founding team hadn’t fronted at least 5,000 euros of their own cash into it. That’s because he won’t give money to people who aren’t sacrificing something to make their company happen.
#2 Have a buffer
Back to my startup, fifteen years ago.
I was under the impression that when our game is live, everything would be fine. The number one fallacy for me: The game would be so great once we get it out, that we’d either be able to raise a larger round of financing or that we’d be acquired by a bigger games company. I wasn’t worried about anything. More fallacies: we had the validation of our previous investors backing us up. Nothing could fail.
The realistic scenario is that everything takes much longer to start working. I should have had a buffer. The chances of unanticipated expenses, in my experience, is close to 100 percent. Of course, you can’t predict everything, but writing down what you know will identify existing problems sooner, and allow others to help.
Don’t pay a premium for everything. Rather, ask for a high discount on everything. You want them to feel that you’ll be in business with them for a long time, so they can give you a great discount for now. If you have a team of founders or early employees, figure out who is the best at negotiating a discount and then send them to cut deals.
#3 Stay on top of things
Five years later, in 2011, my company had eventually run out of money, with support from existing investors dying down. I had to do something else. Supercell had raised $12 million and was hiring. That’s when I joined. I was there for a little over a year. The company was growing and grew to thirty people in just a few months. With that kind of headcount and minimal revenues from a small Facebook game, you’d expect a runway problem?
The difference there was that the management of Supercell was constantly on top of things. The company was building Facebook games during 2011 but shifted to mobile and tablet in 2012. This happened by understanding that it was time to pivot and double down on touch screen devices. Even with thirty people, they were constantly monitoring the cash flow, monitoring the progress they were making. The management made decisions quickly, if and when needed. This agility and staying on top of things, lead to the success story that is Supercell today.
The main lesson here is that you should plan on staying on top of things. Manage your burn, make everything count. In addition, communicate burn rate and runway with the staff and investors, constantly. Not when there’s one month left before cash runs out.
#4 Budget costs
When I was raising the 90,000 euros, I should have had a plan in mind for how long the money would last. There are lots of templates out there for looking at the financing.
To get the Elite Game Developers cashflow template, visit this page.
Also, ask your investors to help with managing your money. Most will know that you can’t afford a full-time CFO, so they can be handy at supplying you with a template on forecasting financials.
Things are already bad, now what
If you are already out of money, then what? There are several ways to tackle this unfortunate situation. Maybe you’re still working on the game and believe that a few more tweaks will help. Or maybe there is an investor who’s ready to fund the company, but the proceeds will still take some time to arrive.
#1 Stop paying salary. First off, everyone who can still work without a salary should continue in that mode immediately. Be careful with giving out the last money to your employees, as there might be serious consequences from not being able to pay corporate taxes or other legally binding fees. The neglect of these measures might lead to the bankruptcy court.
#2 Back to bootstrap mode. If the company was once in bootstrapping mode, assume that mode once more. Don’t be discouraged, you still have the ability to shine, show progress, develop the company and the business.
#3 Lay off consultants. Stop all contracts that are bringing in additional costs. If you’ve had consultants working projects, terminate those contracts immediately.
#4 Stop paying rent. If you have an office space, inform the landlord that the rent payment will be delayed. Keep your calm and inquire about how much leeway you could have. If the situation permits, you might be able to call for delayed payment for a few months.
To summarize, the best way to kill your company is to spend your funds quickly, and without a plan. I’m constantly writing about building better gaming companies.
I also write a newsletter, where I cover topics related to founder happiness and fulfillment. You can subscribe to the newsletter below.