Anti-Cacophony Partners
You’re Probably Not Going to Raise Money in 3 Months
Like everyone else, I’ve got my issues with Facebook, but I’ve got to admit I’m a bit of a sucker for their Memories feature. This particular memory was from 10 years ago, when I was running finance for a cardiac device startup. Now, as a part-time COO/CFO, at any point in time I’ve got at least one startup client that is either actively fundraising or actively planning to fundraise, and let’s admit it — if you’re not in an active fundraise, you’re probably actively planning for one. This memory was a brutal reminder that for the high majority of startup CEOs, your fundraising process isn’t going to go as smoothly as you would have hoped.
If you’re like me, you’re a pretty voracious reader of the tech press, and the tech press is filled with stories of startups raising huge amounts of money at great valuations. So you might think your own fundraising process will go smoothly — kick it off, meet a bunch of investors, and in three months, money in the bank. But those companies written about in the tech press are the proverbial 1%. Deep down, if you’re honest with yourself (and it’s critical that you are), you know you’re almost certainly not in that cohort. There’s some aspect of your story that’s not perfect. Maybe your metrics aren’t perfect. Maybe you’re not at the stage or scale you need to be for this next round. Maybe your last round valuation was too high. Maybe you’ve raised too much money. Whatever the issue is, identify it — because if you don’t, investors will. Investors rely heavily on heuristics to filter through the hundreds of companies they see every year, and if your company doesn’t fit those heuristics, chances are you either aren’t getting a first meeting, or you’re not getting past it.
In the situation that led to this particular Facebook memory, ten years ago, the cardiac device company where I was running finance was a good, solid company. It was building minimally invasive cardiac devices. It had solid revenue, a solid customer base, good investors — Boston Scientific was a strategic investor. On the surface, our heuristics were good. But then we pursued a large acquisition for six months. We took our eye off the ball. The acquisition fell through, and we were left holding an empty bag. We needed to raise money. Fast. But we also knew that because our business fundamentals (primarily revenue growth) had taken a hit while we pursued that acquisition, this wasn’t going to be a normal three-month raise. We needed to extend our runway. And we did — we reduced our cash burn from $2.5M per quarter down to $1.5M per quarter, including a large reduction in force. As we executed on those changes, we kicked off what became an almost full 12 months of fundraising. And because it took that long, even with the runway extension our reduced burn provided, we still almost had to file for bankruptcy. But we were ultimately successful in getting the company financed. It was a large recap, but it allowed us to live to fight another day.
There were, of course, other issues besides poor revenue growth that I won’t get into (great topics for a future post!), but suffice it to say the headline was: bad revenue growth. Your issue will be different. But the point is that there’s probably an issue that will make your fundraising process more difficult than you anticipate, and there are a few things you should be thinking about and doing to prepare.
- Identify the issue! This is the most important thing. If you don’t know what you don’t know, you’re dead in the water. Identify it. Own it. Address it in your investor deck.
- Spend time working through the issue and identifying opportunities to mitigate it. Grab your management team and board and brainstorm. Get your arms around it.
- If the issue can’t be mitigated, try to identify other characteristics of your business that can be elevated, improved, or optimized to minimize it.
- Identify opportunities to extend your runway, including freezing hiring or doing a reduction in force. The more cash on your balance sheet, the more you can fundraise from a position of strength.
- Start your fundraising process at least six months before you run out of cash, if you have that luxury.
- You probably won’t have the luxury of fundraising more than six months in advance, because you won’t have hit the milestone you need for a successful raise (identifying the right milestone is also another blog topic!).
- Given that you probably won’t have enough runway for a 6+ month fundraise, start having bridge discussions with your existing investors. Make sure they understand they won’t be funding a “bridge to nowhere.”
- Consider venture debt, if possible. It probably won’t be possible unless it comes alongside equity money, and debt can be scary, but it’s worth discussing with your board and lead investors.
Do the above, and you will maximize your probability of success. And when the fundraising process slips into month four, you won’t be discouraged. When you walk out of investor meeting #50 with a polite “no,” you won’t be dejected. You knew it was going to be hard, and you planned for it. You’ll get your company funded. Just keep pushing. Good luck!