6. Early-Stage and Debt-Free Startups

Startups are typically debt-free since they are unable to produce positive cash flows or to provide adequate asset-backed guarantees in the first years of their life. Raised capital is so mainly represented by equity, and its monetary component is the cash reservoir that keeps the firm alive until it reaches a liquidity surplus. Cash flow forecasting is crucial to estimate the financial breakeven (runway cash flow), combining the EBITDA generated (or absorbed) by the startup with its change in net working capital and CAPEX. The unlevered features of the startup imply that its opportunity cost of capital is represented just by the cost of collecting equity. In accounting terms, the EBIT tends to coincide with the net result of the income statement (in the absence of debt service and taxes, due to a negative tax base), and the operating cash flow with the net cash flow. When the startup reaches maturity and financial breakeven, it can start raising debt, so increasing its financial leverage. This represents a mighty milestone that can be reached only by the firms that survive Darwinian selection, bypassing the “Death Valley” (that indicates cash- and equity- burnout), and overcoming the “winter of capital.”