Strong Opinions @marksbirch

Random thoughts from a NYC entrepreneur and investor about start-ups, technology and the people that make it all happen. Also find time for good tunes and good food.
Recent Tweets @
Posts I Like

What if your investors decide not to pour further investment into your start-up?  It is not an uncommon scenario to go back to the well for more funding.  You may have raised one or more rounds of funding already, but you are now getting precipitously close to running out of cash.  As I mentioned before, when you are out of cash, it is game over.

But when your original investors drop out, what can you do to stay afloat?  You have five options:

  • Try to persuade them again
  • Find new investors
  • Go super lean
  • Find a revenue stream
  • Wind down the business

Before you proceed down any one path, make sure you lay out the situation and be brutally honest with yourself and the team as to your progress.  Ask yourself whether your start-up is getting traction and shows demonstrable evidence of momentum.  If so, what is the cash situation in its worst and best case scenarios?  Lastly, determine how “X” amount of cash with be used in detail to generate enough traction for an exit or significant funding event.  With this information in hand, you can get a better handle on navigating the situation.

The first place to stop is your current investors.  They are already invested and have a personal stake in your success.  Plus, you have an open door to meet with them.  You may think that you tried every possible strategy to convince your current investors to double down, but you may not have put on the full court press.

Investors do not want to see their money go to waste, but they also do not want to completely write-off their investments.  They are rightly concerned though that you and the team are not getting the job done.  However, with a strong personally delivered pitch that details your steps to make the start-up successful, you stand a chance of turning around some of your investors.  You will want to do the following in your pitch to investors:

  1. Meet with them face-to-face
  2. Ask for their guidance and concerns
  3. Listen and take to heart their concerns
  4. Make a personal commitment to correcting course
  5. Have your plan ready to discuss specifics of the action plan

You may not be able to turn around some investors.  Others are merely spectator investors that put in a nominal investment, but have no interest in participating further.  The objective is to just get some of the investors to commit and use that as momentum to getting new investors.

Getting new investors is never easy, especially if your current investors are hesitant to commit.  The first question a new investor will ask is why your other investors are not committing?  You may be tempted to lie at this point, but you will most likely get found out ruining any chance of ever reaching that investor (and others) ever again.  You are much better off getting at least a couple of current investors to verbally commit before contacting new investors.  If you cannot get any current investors to commit, you have an uphill climb ahead of you.  Your best shot at this point is to go into full-time fund raising mode and network like mad to get in front of as many relevant investors as possible in the hopes that you can turn a few into supporters.

Whether the fundraising goes well or not, you need to take a close look at expenses. You need to consider all possible scenarios, including drastic actions such as laying off employees, cancelling lease and vendor agreements, and withholding paychecks.  This allows you to see how far you are able to extend the life of your start-up till its game over.  If you are already operating as lean as you can possibly go, you need to focus on the next step; finding the revenue.

The best remedy for running low on cash is to find paying customers.  While you may not yet reach cash flow positive in this early of a stage, revenue can provide enough run way to keep the venture afloat, prove that your start-up is a viable and carry you to a large funding event or profitable exit. Introduce Pro features of the product or service to get customers to pay.  Start charging more for existing pay plans.  Determine if it is possible to sell ad real estate on your website or application, or if you can package the user data to sell to others.  Explorer reselling agreements where you give out a portion of your fees to the reseller to driving traffic and generating sales.  The key is to set up some means to generate cash in the near term to stave off decline.

If none of the above options work, you may need to consider shutting down the start-up or at least putting things on hold.  As you are most likely personally broke having committed your own savings into the start-up, you will need to take outside jobs to keep a roof over your head and have food to eat.  Realize however that you cannot commit 100% anymore to your start-up.  You may only be able at this juncture to keep the lights on, which only delays the eventual outcome.  While folks like Evan Williams may have survived the start-up death spiral to save Blogger and eventually sell to Google, this type of successful outcome is a one in a million shot.

The lesson of this post is to not let the spigot run dry in the first place.  If you are serious about staying in business, you need to make sure you keep your investors on your side and always show forward momentum.  I will save those topics for future posts.

  1. marksbirch posted this