Burnrate, Runway and Cashflow for Startups (EIC Accelerator, SME Instrument)

The EIC Accelerator blended financing (formerly SME Instrument Phase 2, grant and equity financing) is seeking excellent and high-impact startups or Small- and Medium-Sized Enterprises (SME) which have reached a certain Technology Readiness Level (TRL – read: How the EIC Funds TRL’s). As part of the profile, such companies have usually received substantial seed investments or have been able to leverage income from either prototype sales or adjacent revenue streams. The European Commission (EC) and the European Innovation Council (EIC) are not necessarily looking for well-funded companies (i.e. non-bankability is still an important criterion – read: EIC Accelerator Buzzwords) but a company with zero-financing usually lacks sufficient product developments or the man-power to implement a disruptive innovation.

Burnrate, Runway and Cashflow

Startup companies are in a position where more funding is absolutely essential to reaching their goals and any disruptions in financing can be detrimental to the timing of the market entry and the competitiveness of the product. What such a startup has to manage extensively, as a first priority, is the monthly burnrate (i.e. how much is spent per month), the runway (i.e. how long will current funds last) and the cashflow (i.e. avoiding liquidity issues).

Consultants or professional writers are usually able to advise companies in these areas but it is essential for each company to be highly aware of these metrics themselves and to track them continuously.

The Risks of Bad Timing

The one factor that connects these three aspects is timing since the burnrate, runway and cashflow are all relative and depend on when financing items are due and what their source is. Bad timing can destroy an otherwise well-financed company in a matter of weeks if incoming financing is delayed but heavily relied upon. A term sheet can be pulled in the last minute, a grant can be cancelled, a customer can go bankrupt and key assets can be destroyed which makes timing and risk-management a priority.

Since such risks can come from a multitude of areas, every startup should always have the option to get lean which means they must be able to reduce their monthly costs to a minimum (i.e. hibernation) in a short time period. There is a simple reason for this: Nobody wants to onboard a sinking ship. If a company regularly has money problems then this can be a reason for investors to leave, due diligences to fail in sight of a potential insolvency or the management team to look for alternative occupations.

Limiting Costs as a Means of Survival

To balance operational risks, a startup has to ask themselves:

• How many employees do I actually need to reach my development goals (i.e. quality over quantity)?
• How tight is my financial planning with respect to incoming and outgoing payments?
• How large is my buffer zone in case expected income is not received (i.e. doomsday runway)?
• When can my company start using profits to bootstrap development costs independently?

There will always be a tradeoff between the risks and benefits of operating a startup on the razor’s edge but not every management team or CEO can succeed in such an environment. Outliers such as Elon Musk who put all of their net worth into their businesses and get dangerously close to bankruptcy if investments are not raised are rare and should not be emulated by most startups (i.e. Elon Musks raised last-minute SpaceX financing).

Conclusion

Having more than a dozen full-time employees for a pre-revenue startup is risky. Having only a 3-day buffer between reaching dept limits and a new investment round is risky. Scaling multiple pilot tests, in parallel, without revenues is risky. Each company has to understand the risks associated with the way cashflow is timed and needs to have an emergency (i.e. hibernation) strategy if funds run out.

High payrolls are impossible to shut down on short notice due to legal protections and a sense of employee-responsibility while a network of freelancers and contractors is much more dynamically adjustable. Property acquisitions or long-term leases can easily become a liability which can be compensated through short term rents with favourable cancellation conditions.

An old saying goes, “Prepare for the worst. The best will take care of itself.“

Agile adjustments are the key to succeeding through tough times and poor risk management can put an early stop to an otherwise excellent business idea.

This article was last modified on Dec 30, 2020 @ 11:31

These tips are not only useful for European startups, professional writers, consultants and Small and Medium-Sized Enterprises (SME) but are generally recommended when writing a business plan or investor documents.

Deadlines: Post-Horizon 2020, the EIC Accelerator accepts Step 1 submissions now while the deadlines for the full applications (Step 2) under Horizon Europe are:

• Step 1
  • Open now: Apply as soon as possible to be eligible for the next Step 2 submission deadline
• Step 2 (closing 17:00 Brussels Time)
  • 1^st cut-off 2025: -
  • 2^nd cut-off 2025: March 12^th 2025
  • 3^rd cut-off 2025: -
  • 4^th cut-off 2025: October 1^st 2025
• Step 3
  • 4^th cut-off 2024: January 13^th to 17^th 2025
  • 1^st cut-off 2025: TBD
  • 2^nd cut-off 2025: TBD
  • 3^rd cut-off 2025: TBD
  • 4^th cut-off 2025: TBD

The Step 1 applications must be submitted weeks in advance of Step 2. The next EIC Accelerator cut-off for Step 2 (full proposal) can be found here. After Brexit, UK companies can still apply to the EIC Accelerator under Horizon Europe albeit with non-dilutive grant applications only - thereby excluding equity-financing.

Contact: You can reach out to us via this contact form to work with a professional consultant.

EU, UK & US Startups: Alternative financing options for EU, UK and US innovation startups are the EIC Pathfinder (combining Future and Emerging Technologies - FET Open & FET Proactive) with €4M per project, Thematic Priorities, European Innovation Partnerships (EIP), Innovate UK with £3M (for UK-companies only) as well as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants with $1M (for US-companies only).

Any more questions? View the Frequently Asked Questions (FAQ) section.

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by Stephan Segler, PhD
Professional Grant Consultant at Segler Consulting

General information on the EIC Accelerator template, professional grant writing and how to prepare a successful application can be found in the following articles:

A Quick FTO Guide for EIC Accelerator Applicants in a Rush

2023 Budget Allocations for EIC Pathfinder, Transition and Accelerator

Developing the Unique Selling Points (USP) for the EIC Accelerator

Explaining the Resubmission Process for the EIC Accelerator

A Short but Comprehensive Explanation of the EIC Accelerator

EIC Accelerator Success Cases

Deciding Between EIC Pathfinder, Transition and Accelerator

A Winning Candidate for the EIC Accelerator

EIC Accelerator Interview Preparation Process: Scripting the Pitch (Part 1)