Unfortunately, with the UK now facing the worst cost-of-living crisis in 60 years, there are shifts happening within the startup market. We’ve seen VCs pause on writing checks, we’ve seen high-growth startups initiating layoffs, and we’ve seen companies failing to raise their next rounds. In the later stages, we’ve seen public tech stocks take a hit, late-stage crossover funds licking their wounds, and a tightening in the credit cycles. This comes after a nearly decade-long bull market and low interest rate environment.

As many business owners finding their working capital needs accelerating, coupled with rising expenses - it’s more crucial than ever for entrepreneurs to find appropriate financing to scale their businesses, all while avoiding extremely dilutive funding, high-interest loans, or eating into personal savings.

How should fast-growing companies evaluate and navigate the next 12-24 months? How can entrepreneurs successfully navigate the cost-of-living crisis to scale their business quickly? Let’s dive into it.

The only constant is change

Fast-growing companies have unique needs. They are often the backbone of a growing economy and are usually capitalising on a quickly moving market opportunity that needs to be executed in real-time. In other words, time is of the essence. From hiring talented employees to getting access to more capital - high-growth startups that have found product-market fit must have their ever-growing needs addressed in real-time with flexible solutions.

In addition, after a difficult two years since the onset of COVID, many startup founders and entrepreneurs have been hoping that 2022 would reset the business landscape and provide much-needed economic support. Yet outside pressures, such as the supply chain shortage, the Russia-Ukraine war, and growing inflation, are all adding to the overall cost-of-living and market uncertainty. Small businesses have not yet benefited from the level of support otherwise expected and the outlook is bleak.

Given these new market dynamics, it is imperative for startup founders to do an internal assessment of where they stand and determine if they need to secure additional growth capital to successfully navigate the next 12-24 months:

1.    Assess your existing cash position:

The first step is to do an honest assessment of your existing cash position. The goal here is to take a crystal-clear look at all your cash coming in compared to any expenses going out. Make sure you have a cash reserve or projected cash flow to cover at least the next 12-18 months (or ideally the next 24 months). We sat down with global VCs recently and 'at least 24 months of runway' is what is circulating around the board rooms of high-growth startups. Without this, you will be at the mercy of down rounds, high-dilution capital, or exorbitant rates and structure to survive. None of which are good. If you find yourself in any of these positions, you’re not the one controlling your own destiny.

2.    Reduce burn and then reduce it some more:

The simplest way to extend your existing cash position is by reducing burn. This might sound easy but requires ruthless prioritisation of company initiatives to determine which areas your team should focus on to fuel real growth and actual net profit. The burn multiple (i.e. how much a startup is burning to generate each incremental dollar of ARR) is often a good test to understand the quality of the revenue that comes in. The goal is to get a burn multiple of one or less. If you are not seeing your burn multiple in that range, it is time to re-evaluate priorities to only focus on the core business. A good example of this is reducing plans for new product launches or geographical expansion and instead focusing on optimising the unit economics of the core business.

3.    Evaluate your options for accessing capital:

As you work with your finance team to determine different scenarios for surviving the next 12-24 months, you may arrive at a point where access to additional capital is what you need to survive and thrive on your own terms. At this point, it is worth looking at all the different forms of capital to determine what is the best for your business. Traditionally in low interest rate markets, venture capital was easier to access and banks were lending at rock-bottom prices. However, as the market is now tightening and rates now increasing, this won’t be the case for long. Non-dilutive growth capital can be an attractive solution for many founders to access more money to keep their momentum going.

Fair, seamless, and flexible access to working capital 

So, what exactly is non-dilutive growth capital?

It’s no secret that startups are accustomed to facing cashflow issues when trying to grow their company. According to Intuit  - around 57% of SMEs fail because of cash flow issues.  As a new business gets off the ground, it can suddenly incur a plethora of costs - be it rent, wages, insurance, or supplier costs. This can soak up capital or create financial uncertainty and in turn, stifle innovation and momentum.

To survive these cash flow constraints, small business owners will either turn to equity investors (most often time VCs) or debt investors. Debt investors usually run the gamut from traditional banks, online lenders, and specific venture debt funds that mainly finance venture-backed companies. 

Equity investors are often the ones most founders turn to in the beginning. Whether those are family and friends or wealthy individuals or professional investors, these early equity investors are crucial to helping the business off the ground when there is virtually nothing. In return for the risk, they get compensated through equity stakes in the businesses that will hopefully be worth a lot more down the line. Equity is an amazing tool to get started and then scale, but it can also act as a double-edged sword given the high dilution (i.e. percentage of the company) it implies. In other cases, many founders don’t want to relinquish control and equity is not well-suited to enable founders to run their businesses as they see fit.

In the debt world, while there are many different flavours of lenders for SMEs, some of the same truisms remain. They are slow, expensive, and burdensome to businesses. To start, bank loans and most online lenders ask for personal guarantees, won’t lend to newer businesses, and will charge extremely high rates. The underwriting process is often lengthy and tedious as they look for detailed audited financials or credit bureau reports as ways to underwrite versus looking at leading indicators and real-time data. Venture debt, on top of many of these constraints, also takes warrants and layers on covenants to make the cost of borrowing increase. They think like debt providers (i.e. 'protect the downside') but want the upside of equity investors (i.e. “give us a percentage of your business”).

Luckily for founders, there is another option. For hyper-growth start-ups, this gap can be filled in by fintech companies focused on providing growth capital. Fintechs are – or have been – early-stage, fast-growth businesses themselves, so they understand the issues faced by fast-growing businesses first-hand. They are also more agile than their counterparts in traditional financial services and better reflect the startup values of “move fast and break things”. This is all while delivering a digitally-led, mobile-native, superior customer experience.

Many high-growth fintechs, offer these lines and target fast-growing companies who have recurring revenue streams. They don’t look at traditional metrics or have the traditional costs that banks have made them the perfect partner for growing SMEs. Where they specialise in is being able to unlock future opportunities by giving businesses the present value of those revenues. They can in turn support growing businesses over the long term. In times of market uncertainty, having a partner that can provide more capital as you scale your revenue without having to go back and test the debt or equity markets is a huge advantage.

Turning to fintechs that specialise in revenue-based financing can be a game-changer in unlocking working capital without the sting of giving up equity or materially affecting runway.

Ultimately, this means that startups have more control over their own destiny. With faster, more flexible access to finance, business leaders and entrepreneurs can avoid the 'now or never' conundrum where the future of the company rests on a knife-edge.

The only constant for a fast-growing startup is change. The next 12-24 months will be a make-or-break period for most startups and non-dilutive growth capital can tip the odds in your favour to help you survive and thrive in the new economy.