Expecting the Unexpected: The Zero-Revenue Forecast Every Startup Should Prepare

One common but dangerous oversight I see in startups is the lack of downside financial planning and realistic runway projections. In an environment where funding is scarce, this can lead to an abrupt financial crisis, and the premature death of a startup. Hope for the best, but plan for the worst. 

Many startups look at run-way assuming overly optimistic revenue projections. It’s difficult to model topline in the early stages because of a lack of data. There’s also a tendency to present overly optimistic forecasts to fundraise and get investors excited. The net effect is that you grow headcount too quickly, the revenue does not materialize, and you have a gun to your head as it relates to raising a bridge round or needing to find a quick buyer. 

In January of 2020, my head of finance presented to me our financial plans for the year, emphasizing a scenario I hadn’t considered: 0 revenue. Our biz had generated millions of revenue the year prior, we had just signed a non-binding memorandum of understanding (MoU) with a large customer for a $12M ARR deal a week ago, and we had just completed a $25M Series B. Why were we discussing this scenario? 

This seemed way too draconian, even for a downside scenario. But, I thought the world of him, and he had spent a ton of time on the forecast, so we took the next half hour to talk through the worst case scenario. 

Thankfully for us, we still had 28 months of run-way, and 12 months of run-way at the beginning of 2021, even if we continued to grow headcount and top-line stayed at 0. We proceeded to talk through various scenarios including slowing down hiring, lay-offs, and other cost savings, if revenue did not materialize as we expected.

Just 3 months later, our largest customer walked away from the $12M deal, a handful of our other customers ran out of money. We were living the worst case scenario. And, we lived in this environment for the next 1.5 years. Just thinking about this season of the startup journey triggers a lot of traumatic memories. Startups are not for the faint of heart. 

Thank goodness we had a plan. 

Effective Runway Modeling for Startups:

Startup runway refers to how many months your business can keep operating before it's out of money. 

So, if you have $3M in the bank, and you burn $300k per month, you have 10 months of run-way. 

We would suggest modeling run-way in 3 ways, and reviewing this every month when you close the financials. 

1. Months of run-way based on current monthly burn

2. Months of run-way based on peak monthly burn 

3. Months of run-way at the end of the year, assuming you continue to grow expenses 

Suppose any of these scenarios makes you feel uncomfortable as a CEO (e.g. based off peak monthly burn, you only have 6 months of run-way left). This suggests it’s time to take a look at your expenses and see if you can cut. In the current environment, startups should optimally have 18 months of run-way, and a clear pathway to profitability, so you can control your own destiny. 

Overall Learnings:

1. Raise money to bolster your balance sheet, when times are good, when you don’t need it. Don’t get greedy, and take the money if it’s available. 

2. As part of your annual budgeting and forecasting process, spend time modeling out the worst case scenario, and discussing what you would do. Then, put it away.

3. During difficult market environments, it can take much longer than you think to find a buyer for your startup, or raise another round of capital. 

The #1 job of a CEO is to make sure the company never runs out of money. As long as you have cash in the bank, a team that believes in the vision, you can continue to fight another day!