StartupNorth

Tag: fundraising

  • A Public Service Announcement

    I keep seeing entrepreneurs that complain to me after the fact that they took an investment with bum terms. It comes in many different ways, usually something like, “here’s my cap table what do you think?” or “I have this term sheet what do you think of the terms?”. The terms are usually appalling. But the entrepreneurs asking don’t know this until it is too late, they signed the documents, they spent the money, and now they want advice raising the next round.

    https://twitter.com/rhh/status/344232460533518337

    It looks like I’m not alone. If you can’t figure out this is war. This is information warfare. I forget that I work with a lot of great investors. They look for deals that work for them, their portfolio, for their investments and the potential investments. But I long ago realized that my interests and the interests of existing investors or potential investors were not always in my interest, particularly when things start to go bad. I wish all investors were as honest as Brad Feld with their desired investment rights. But there are bad investors out there. They look to use an information asymmetry to gain greater advantage over uninformed entrepreneurs. It allows them to buy large ownership percentages at reduced rates with additional rights that are not always in the favor of entrepreneurs. They tell entrepreneurs that it is ok, their capital brings additional non-dilutive government capital and the entrepreneur will have the cash to grow. They are trying to maximize their returns by exploiting the information asymmetry.

    And I don’t like seeing people being exploited.

    Clark Stanley's Snake Oil Linments

    It is not the first time that someone has used both simple and sophisticated tactics to take advantage of people. Part of the creation of the Securities Exchange Commission to allow, in this case, the US government to bring civil actions ” against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law.” Before the enactment of the commission, consumers were protected by “blue sky” laws, but Investment Bankers Association told its members as early as 1915 that they could “ignore” blue sky laws by making securities offerings across state lines through the mail. Many investors are money grubbing capitalists and that’s the way I like it. But as an entrepreneur the only person looking out for you is you. So rather than  leave yourself ignorant and uninformed it is your responsibility to reduce the information asymmetry. After all, it is your company and…

    Knowing is half the battle

    The person that is responsible for your success and the success of your company is YOU!

    So stop blaming bad investors. Stop blaming lawyers. Stop blaming others. You need to take proactive steps to reduce the information asymmetry

    1. Get educated
    2. Due diligence on your investors
    3. Participate and share

    1. Get educated

    Fifteen years ago, this information was very difficult to access. The first book that I read about venture capital was High-tech Ventures: The Guide For Entrepreneurial Success that was written in 1991. Part way in to my second venture (I was employee number 6 for the record) John Nesheim released High Tech Start Up, Revised And Updated: The Complete Handbook For Creating Successful New High Tech Companies in 2000. This was my early education about venture capital, high potential growth companies. But most of the lessons came from the school of hard knocks. But things have changed. There are a tonne of resources available to entrepreneurs.  Here is a short list:

    This is your business. You are taking outside funding. You need to understand what is happening in the process and why.

    2. Due diligence on investors

    The investor is doing diligence on you and your company. They are going to talk to your previous investors, your employees, your customers and maybe your prospects. They will take to people in their circle of trust to learn about the market, expected performance metrics, and your reputation. It is incredibly important theyunderstand the risks and accretive milestones before presenting you to their investment committee.

    “I will not let my investors screw me” – Scott Edward Walker

    You must do your own due diligence on the investor before taking any money. This is going to be a partner in your company. It has often been described as a work marriage. You should need/want to understand more about this person, the firm they work for, and how they treat their existing companies and CEOs. Go for dinner, have a glass of wine, talk about your company, and figure out if you can work with this person for the next few years. Talk to other CEOs that they’ve invested at a similar stage as your company. Talk to the ones that succeeded, to the ones that failed. Talk to the people that the investor sends to you to do diligence. There are so many tools to expose social relationships that didn’t exist: LinkedIn will allow you to send InMails to past CEOs; Clarity allows you to connect with a lot of entrepreneurs and mentors that have a connection with the investor; AngelList is a great tool for discovery but it is also becoming a great way to see investments and help you in your diligence.

    “the diligence factor was that I knew them, but had never taken money from them. It’s hard to know how people are going to react when they are at risk of losing money because of something you are directly responsible for until you are actually at that point.” – Brandon Watson

    3. Participate and share

    The above resources are amazing. However, I often learn best from the examples of others. I learned a lot from Mark Organ at Influitive. Mark shared stories about the good and the bad decisions he made in the early days at Eloqua. You learn a lot when you share a hotel room on the road as grown ups.

    There are formal meetups like Founders & Funders. But seriously in order to have the trust, you need to get out of the office and the formalities of these events. The conversations come over a poker game. But you’ve got to put yourself out there, be vulnerable, and find people that can teach you something.

    CC-BY-20 Some rights reserved by slightly everything
    Attribution Some rights reserved by slightly everything

    I believe so much in this that I’m renovating my house. I want a big kitchen for family dinner. All of my startups will be getting an invitation to Sunday night dinner. Why? Because I’m betting my family’s future on them, and I want them to be a part of the family.  This includes the ones that I’ve invested in already and any of the companies that I’m looking at investing. I want them to hang out. I want them to help each other. Share metrics and tactics. I want them to tell you that I’m slow to invest. I’m slow even after I’ve said yes (but I hope they understand that it is because sometimes I have to do some consulting work to have investment dollars). (Now I just need the renovations to finish).

    Feeling screwed?

    I’m starting to think about publishing shitty term sheets, depending on the risks our lawyer identifies, with investor names. I’m not sure public shaming is right model, and my lawyer might tell me it is not. But I think that we need to elevate the conversation we as entrepreneurs are having with each other and our investors.

    I’ll be publishing prospective term sheets in the next few days.

    Reach out if you want to share.

     

  • Atlantic Canadian Founders Deserve Better Than FAN (First Angel Network)

    CC-BY-NC-ND-20 Photo by Stephen Poff
    AttributionNoncommercialNo Derivative Works Some rights reserved by Stephen Poff

    Recently, I have had the pleasure of travelling to the East Coast and working with founders. I have seen the amazing companies and the founders across the region. Moncton, Halifax, Saint John, St. John’s and Charlottetown (among the varied cities). There are amazing companies like LeadSift (disclosure: I work for OMERS Ventures who is an investor in LeadSift), GoInstant, Verafin, Clarity.fm, Lymbix (disclosure: I sit on the Board of Directors), Introhive, InNetwork, Compilr and others.

    The region is bristling with great founders, great ideas and a lot of untapped talent. It also holds some amazing secrets like Toon Nagtegaal (LinkedIn) who runs a (also ACOA funded) program for startups that I have been lucky enough to be invited to co-teach (disclosure: this is a paid consulting gig). There are amazing people and companies across the Atlantic Region. It’s only a matter of time until there is another HUGE exit.

    However, the region also is a small community that has it’s own culture and politics. Those small town politics have allowed nepotism and crony capitalism to seep in and it has allowed terrible deal structures to be put upon unsuspecting founders and companies. This pisses me off!

    When we started StartupNorth we promised ourselves we would always stick up for founders and startups when it mattered. We continue to  support, educate and connect startups and founders with other founders, with capital, with new ideas and educational resources. We need to identify the BULLSHIT that is being allow to pass in Atlantic Canada as supporting entrepreneurs so that the amazing investors that are there don’t have to compete with a backwards and ill-conceived entity.

    First Angel Netowrk

    Who? I’m talking about First Angel Network (FAN). Why? Here is an example of the full deal they present to entrepreneurs:

    1. Startups apply to pitch the non-profit FAN which is funded and supported by ACOA and others.
      • Most of this funding goes to pay salaries as well as to cover travel expenses.
    2. If a startup is selected to pitch FAN, the startup must agree to pay $3000 to the non-profit  FAN.
    3. Startups MUST also sign a “Consulting Agreement” with a for-profit consulting company owned by Ross Finlay and Brian Lowe.
      • You can NOT pitch the non-profit UNLESS you sign the consulting agreement with the for-profit company.
    4. Startups then pitch the non-profit and if successful get a deal done
    5. If a deal is done, the consulting agreement gives the for-profit shell company and FAN organizers 8% of the total proceeds of the transaction
      • 4% in stock directly to Ross Finlay and Brian Lowe (not the consulting company, directly to the individuals)
      • 4% in cash to the consulting company

    This is so wrong! On so many different levels. This is worse than pay to pitch.

    Crony Capitalism

    The thing that pisses me off the most is that the most nefarious part of the process, the consulting company and payouts to individuals, is not listed on the FAN Funding Process page. We have individuals who collect a salary that is partially (if not completely) funded by a government agency (ACOA). First Angel Network Association received at least $1,123,411.00 in funding between 2006-2011 (nothing reported for 2012). That is an average of $224,682.20/year in funding, and that is just what we could source publicly.

    Getting paid by a government agency to source your own deals. Seriously, if you thought management fees were high, what about tax dollars going towards salaries of investors. They are using federal funding to source their own deals and cover expenses and salaries. Something is wrong here. Then they charge entrepreneurs for the privilege of their investment. Which someone already paid them to source. The cost of this capital is incredibly expensive to entrepreneurs taking this investment and to the region.

    Atlantic Canadian entrepreneurs and startups deserve better than this.

    Do Not Pay to Pitch

    Startups should not pay angels or angel networks to pitch. Jason Calacanis wrote the definitive piece on why startups should not pay angel investors to pitch.

    “It’s low-class, inappropriate and predatory for a rich person to ask an entrepreneur to PAY THEM for 15 minutes of their time. Seriously, what is the cost to the party hearing the pitch? If you answered “nothing” or “the cost of two cups of coffee” you win the prize!”

    Jason eloquently describes why this doesn’t work. It is a imbalance between cash poor startups and rich investors. The imbalance is made worst by. We have been running Founders & Funder$ events. There is no imbalance. Everyone pays the same. Founders. Funders. We try to curate the audience to ensure that only founders actively raising money attend. We also invite a limited number of funders that are actively doing deals (criteria change based on angel investor versus institutional investors). We want everyone to be on equal footing.

    And there are a lot of startups and founders that will argue that Jonas, Jevon and I have strong track records (well at least Jonas & Jevon do) and even stronger networks:

    “Now, before you go saying “Jason is connected and he has access to angels” remember that I hustled my way into this industry from nothing. I networked at free conferences and figured out a way to get on the radar of uber-angels like Ted Leonsis, Fred Wilson and Mark Cuban. They paid attention to me because I had good ideas. If my ideas had sucked, they would have ignored me. Period.”

    Our goal has been to help connect and educate founders and startups. We continue to believe that it is not government agencies, or venture capitalists, or angel networks that will build the next generation of successful Canadian companies. It is the founders and the employees of these startups. It’s the big ideas and the big execution that result from the efforts of dedicated people. They are the ones who deserve a great deal, not some middle man.

    What can you do?

    1. Do not pay to pitch. Avoid groups like First Angel Network like the plague.
    2. Tell the people who fund FAN and other angel groups who have a pay to pitch model that you believe they should cut off funding.
    3. If you know an angel investor within an angel networks that make you pay to pitch like FAN, tell them what a bad deal they are getting and offer to connect them to great founders.
    4. Help fellow entrepreneurs by making introductions to qualified angels directly
    5. Explain to your peers that an investment by networks which make you pay to pitch, such as FAN, can only be considered as a means of last resort, and taking this money will affect your future funding opportunities negatively.
    6. List your startup on AngelList, our StartupIndex, Techvibes index and other places to get exposure FOR FREE to great investors

    Atlantic Canada is generating some of the highest returns in the country right now for angel investors. The community is small but very focused on big outcomes and it is really showing. I think it’s time to cut ties with this old model and to start giving the founders in Atlantic Canada a deal worth taking.

  • The first rule of real estate

    Before you read this, go read Mark MacLeod’s post on Who not to take money from…. It’s not related to this post, but a great post for entrepreneurs to read when talking about investors.

    RT @Cmdr_Hadfield Chris Hadfield 19 Jan With a long tradition of hockey on the shore of Lake Ontario, introducing Toronto - Go Leafs Go! @MapleLeafs pic.twitter.com/iZdN2yZb

    If geography doesn’t matter, than why do plane tickets cost so much?

    “When it comes to raising funds, I just don’t think the geography matters that much. Good solid product that solves an actual pain can find it’s way to investors any where in the world thanks to the internet.” – Adeel vanthaliwala

    I read a lot of comments like Adeel’s. And I agree that geography might not be the most meaningful filter, it still impacts startups in raising capital. It is far easier to raise money from a broader range of sources today, than it was 10 years ago. Changes to Canadian Tax Act (Section 116) have helped open the border to outside capital. There has also been a rise of new Canadian funds that have all closed in the past 2-3 years including: OMERS Ventures, Relay Ventures, Rho Canada, BDC Venture Capital, Real Ventures, Version One Ventures, Golden Venture Partners, Tandem Expansion Fund , Georgian Partners, etc. I worry that comments don’t take into consideration the complexity and challenges of raising capital. The impact of geography on raising capital has been reduced, but geography does still affect startups raising money.

    Fugetaboutit!

    The best advice on geography is from Brad Feld in 2007:

    1. Don’t worry about it
    2. Be realistic about the available resources
    3. Find the local entrepreneurial ecosystem – now!
    4. Don’t try to get investors to do unnatural acts
    5. Don’t play the “we can be virtual” game

    From the point of the investor, geography probably doesn’t matter that much. Unless of course there is a limitation in the partnership agreement that limits the geography where the capital can be invested. There are other more practical concerns about having remote startups including legal and or taxation concerns (see Section 116). Or the ability for a startup to leverage personal/professional networks for hiring, business development, etc. And none of this describes the challenges of having to spend 6 hours flying each direction to attend a board meeting. But beyond that, proximity is not a requirement from the investor side. Good startups can be located anywhere.

    “Local brewers = geography matters. As macrobrew VCs are increasingly spending time in multiple geographies (separate from their HQs) there is real potential to differentiate along knowing that you can actually sit down and see your VC face to face. For some that’s important, but for some that’s a negative. Just as some people here in Boston prefer drinking Cambridge Brewing Company ale; others could care less it was brewed locally.” – David Beisel

    I like David Beisel’s   model of the VC industry starting to become more similar to the beer industry. There are larger funds, local funds, specialized funds, and individual partners. They all matter differently to entrepreneurs depending on the company, stage of development, location, etc. Understanding the available resources and your ability to access them are key.

    Traction trumps geography

    Non Linear Growth

    There is going to be the inevitable argument about companies raising money from foreign VCs. The great news is since the changes to the Tax Act and the fall of Section 116, we have a lot of examples:

    Not to belabour the point, it is possible to raise capital from foreign investors in Canada. But the level of traction demonstrated by most of these companies was very high. For example:

    “Since HootSuite’s Series A financing, we’ve grown from 200,000 users to almost 2.5 million! We’re proud of our progress and are looking forward to the future with more success on the roadmap.” – Andy Au, Hootsuite

    According to my calculation that’s a 431,690% CAGR of the registered users between when they announced their Series A and Series B financing. Go big or stay home. Traction and growth trump geography. Paying customers, a scaleable business. Being able to demonstrate that for every dollar that goes into the business you understand how many (more) dollars come out. You need to be able to demonstrate appropriate milestones to mitigate risk.

    Avoiding Unnatural Acts

    “Don’t try to get investors to do unnatural acts: Assuming you are looking for capital, focus your energy on two categories: (1) local investors – either angel or VCs and (2) VCs that are interested in the specific business you are creating. In category #2, “software” is not a specific business – you need to be a lot more granular than that. Your chance of #2 is enhanced by a relationship / investment with someone in category #1, so make sure you focus enough energy on that early on.” – Brad Feld

    The secret here is that social proof that VCs are doing deals north of the border is not enough on its own. You need to focus your efforts, and assuming that you’re doing everything you can to hit accretive milestones you still need or want to try to avoid doing unnatural things. A local investor is not required, but it can be a signalling risk about the team, market, product, or other, i.e., what am I missing if local investors are cold? (There are situations where you can imagine an entrepreneur choosing to avoid local investors, particularly if they have had a deal go sour in the past, but usually the entrepreneur discloses this very early).

    What to do about location?

    1. Fugetaboutit!
    2. Start nailing concrete milestones that demonstrate traction and mitigate the risk associated with your business.
    3. Get connected to your local community. Look for events like Founders & Funders, Elevator Tour or GrowTalks to have initiate low risk conversations with both local investors and entrepreneurs that have raised capital.
    4. Do your research! Use AngelList, Google, Bing, LinkedIn, portfolio pages, etc.  to find partners following and investing in companies in your very specific vertical.
    5. Figure out who locally is investing locally and figure out how to get a warm introduction and find 30 minutes to meet.
    6. Listen, ask questions, try to figure out what is missing, what is the biggest risk factor and how you might mitigate the risk.
    7. Rinse and repeat with non-local investors aka get your ass on a plane and keep hustlin’ (go re-read Mark Suster’s Never ask a Busy Person to Lunch).

  • GROWtalks in Toronto Feb 21

    GROWtalks

    Debbie Landa, Clare Ryan and the Dealmaker Media team are part of the reason that I love GROWConf and GROWtalks. They put on amazing events by putting entrepreneurs first, foremost, and front and centre. They are bringing GROWtalks to Toronto (Feb 21) and Montreal (Feb 19). And we have a discount code at the end of the post.

    “A hands-on playbook for creating startup success”

    I like learning by example. It’s a mixture of seeing what worked for someone else, and then trying the appropriate tactics customized for my situation. The challenge is trying to do with more efficiently than 9 or 10 coffee meetings. GROWtalks brings together the best entrepreneurs, who are killing it, and has them present what is working for them. THis is what GROWtalks is, an event for entrepreneurs with entrepreneurs sharing their strategy, tactics, metrics and successes, even the failures. (Full disclosure: I am MCing the GROWtalks event, however, I am not being compensated for this, but I do get the opportunity to participate and learn).

    Check out photos from the 2012 GROWtalks event in Vancouver:

    It’s rare we get this many awesome startup founders all talking about the hard part of their business. I know that all of these folks will be around throughout the day, they’ll be hanging out, answering questions. It’s going to be a fantastic day. Check out the line up:

    I might be biased. My employer is an investor in some of the presenters. My cofounder is one of the presenters. But I’m honestly stoked about the speakers. I’m really looking forward to hearing Beltzner, Rutter, Fitton and Morrill. The mix of product, early customer acquisition and understanding lifetime value are converations I have with almost every founder. I’m very curious to hear the opinons, experiences and thoughts of this group.

    Part of my MCing was to request StartupNorth logo tattoos for all the speakers (we’ll see if that happens), and a discount code. Register before Februrary 1, 2013 and get 10% off (use promotional code: startupnorth). It reduces the ticket price from $195 to $175.50.

    GROWtalks Toronto

    February 21, 2013, 10am-4pm

    Size: 200-300 people
    Speakers: 9 Industry leaders
    Time: 10am-4pm
    Website: www.growtalks.com
    Toronto: http://www.growtalks.com/events/toronto/

    GROWtalks is a one day conference focused on how to create simple, actionable metrics, and use them to make better product and marketing decisions for startup success. Industry experts will share actionable advice to startup teams on how to improve design, product and customer development, acquisition, retention, and more.

    Topics Covered:

    • Customer Development
    • UX/UI Design
    • Growth Hacking
    • Customer Retention
    • Fundraising
    • Customer Engagement
    • Product Development

  • Fundraising, Valuation and Accretive Milestones

    CC-BY-ND Some rights reserved by HappyTramp87
    AttributionNo Derivative Works Some rights reserved by HappyTramp87

    I keep having a similar conversation with early stage entrepreneurs about fundraising and valuation. “Do you think a $1.5MM valuation is good?” “How much should I be raising?’ Well, it depends.

    I’m finding more and more, the conversation about valuation is one that resembles not being able to see the forest because of the trees. Early stage entrepreneurs tend to fixate on valuation and assume product is the biggest risk at the seed stage thus defining product launch metrics as key metrics. Often, valuation and risk mitigation are tied together. And the milestones or traction metrics required to mitigate risk can help establish valuation. 

    Valuation

    Fortunately, valuation is a topic that others have covered. Nivi and Naval, on VentureHacks, have provided incredible insight into early stage fundraising over the past 5 or 6 years. The advice is often summarized, “as much as possible is especially wise for founders who aren’t experienced at developing and executing operating plans”. The translation means that founders see rounds of seed stage companies raising $4.2MM at what must be a huge valuation.

     “‘As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.’ ” – Nivi

    You can make some basic assumptions about the valuation. Most seed stage companies should be looking keep dilution in the 15-20% range. The specifics will be determined in fundraising but you can start to do some back of the napkin estimates:

    You start to see a range for how much a company will raise at what valuation. The numbers aren’t set in stone but they provide a framework for estimating the amount valuation. As Nivi points out the difference between a seed round and “a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool)”. The more you raise early, the more dilution you can expect. The goal becomes managing the different risks associated with startup. You also see why raising debt early, which allows companies and entrepreneurs to delay valuation until certain accretive milestones, is attractive.

    “The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.” – Chris Dixon

    So given the back of the napkin dilution terms, what are the milestones that you will need to hit in order to raise the next round.

    Raising the next round

    So you’ve raised a round, how much should you raise at the next round?

    I like the rule of thumb that Chris Dixon uses. “I would say a successful Series A is one where good VCs invest at a pre-money that is at least twice the post-money of the seed round.” The expectation is that companies are roughly going to double their valuation at each raise. This isn’t to say that a 2x increase in value is your target, it’s the minimum, the floor. The art of raising a round it to raise enough money to get to a significant milestone, and not too much money taking too much dilution too soon. So how do you define the milestones. The milestones

    “partly determined by market conditions and partly by the nature of your startup. Knowing market conditions means knowing which VCs are currently aggressively investing, at what valuations, in what sectors, and how various milestones are being perceived.” – Chris Dixon

    So part of the market conditions, i.e., raising money in Canada is different than raising money than in Silicon Valley, New York , Tel Aviv. You are measured against your peers, and this might be defined by geography of the company or the VC. Being connected with other companies, advisors and investors can help provide insight in to the fundraising environment. The second part is determined by the nature of your startup, but generally expressed as measures of traction. We’ve talked a lot about getting traction and what traction looks like to a VC.

    “The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone. Building a product is only accretive in cases where there is significant technical risk – e.g. you are building a new search engine or semiconductor.” Chris Dixon

    Entrepreneurs tend to focus on the product early. This is usually because the product is something that entrepreneurs can directly affect. But the product risk, is may not be the  biggest risk that entrepreneurs need to mitigate early. The trick is figuring out which risk you need to eliminate to satisfy potential investors. And you can try to figure this out yourself, but I like to see entrepreneurs engage investors and other founders to get their opinion. The discussion usually is a combination of what other startups are seeing in the market place as milestones from investors (yay, market place data). Then you can work backwards the necessary resources and burn rate to reach those milestones.

    Thoughts?

    Additional Reading

  • Surviving The Cash Crunch (Part 1)

    Photo by © 2008 Daniela Hartmann
    Photo by © 2008 Daniela Hartmann

    You are 3-6 months away from running out of cash.  Your current business model & strategy isn’t going to make it happen over that same period.  You are unable to raise a new round.

    This is another classic stage for mid-stage startups I’ve heard nicely referred to as “controlled burn”.  You either need to pivot onto something new or give your current strategy time to break-even, whatever it is you need to do, you don’t have the cash to do it without doing something about costs.  So you need to turn 3 months of money into 12 months of money or more.

    I’m speculating, but the number of start-ups who hit a cash crunch over all-time probably approaches infinity.  Annoyingly though it doesn’t get written about often and there isn’t a lot of useful advice I’ve found.  Having seen this a few times and talked to a many companies with this type of problem, I thought I’d try and touch the topic with some useful tactics.  One key note – all of this needs to be done in advance of running out of cash, not once you have run out of cash.

    Do NOT Raise Too Much Money, Too Early

    My first advice is preventative.  I’ve been part of teams that have raised $0, $80mm and $20mm as the initial round.  So I have some very real world experience with both ends of this argument.

    Photo by Stephen Poff
    Photo by Stephen Poff CC BY-NC-ND 2.0

    There are two problems.  The first is that if you raise a lot of money, your investors expect you to do something with it, not sit on it.  You are expected to get “fat”.  Hire a great mgmt team, hire middle mgmt, hire depth, have project managers, have tons of software firepower, big marketing plans, big markets, etc, etc.  This means that your burn will probably be stupidly high and you’ll probably hit cash flow problems marginally past that of a team that raised much less capital.  It means your cuts are more painful and the “paradigm-shift” is larger.

    On the other side, you eliminate options for handling cash flow issues by raising too much, too early.  Imagine each $5mm increment as chopping off a tier of the investing market for your company.  Somewhere past say $20-$30mm you need to have the financial results to match your valuation to enter into these new “investment markets”.  You can end up pigeon-holed into a tiny corner of the investment world – need lots of money, have a great team/idea, but don’t yet have the results to justify the results…. uh oh.

    This is where founder-killing down-rounds and inside-rounds happen and equity disappears.

    Layoffs

    For most startups, the biggest cost is people.  If you want to control burn, there’s probably no way to get around dealing with this.  So here’s a few ways to actually bring down people cost:

    1. Cross the board pay cuts – CEO goes to $1, mgmt team takes large cuts, staff take smaller cuts.  Keep the team together.  (Usually you talk yourself into this strategy because you have like a half a percent chance at having some big company who you’ve met once buying you)
    2. Big layoff day.
    3. Offer packages, options to furlough or take time off – “anybody want to take 6 months off to travel the world and want to come back to a full paying job?”

    Generally, I’m a fan of cut deep, fast and once.  If you try to be the “nice guy” and retain people for less money, etc – you are screwing everybody.  Many employees will get a new job before your notice period ends and it’ll probably pay more than they made now.   You are not being nice by offering them a chance to stick around at reduced pay.  Others have big enough bank rolls to live without income for a bit and will take time off and deliberate about jobs – e.g. senior mgmt.  For some, layoffs are common territories – for instance accounts and analysts, often the first to go as they are nice to haves, not must haves in a cash conscious company.  Other folks will use this as the impetus to do their own entrepreneurial adventure and will get rich because you laid them off.  So really, don’t get all teary and sad about laying folks off – many will be able to handle it and you aren’t doing them a favour by keeping them around.

    My “nice guy” layoff tactic would look something like this.  Do all your layoffs at once and give a reasonable notice period (4-8 weeks??).  Don’t spend much time deliberating and talking to folks – morale dies quickly and people stop working when waiting for a decision.  Do it and make sure to do it deep enough the first time.  Then, go out and help the people you laid off find new jobs.  Reach out to your vast startup network – for every startup laying off, you can probably find a new one hiring, especially folks with startup experience.  Then, give some time, say 4-6 weeks.  Then and only then, if some folks seem to be in trouble financially and unable to find work – offer them contract work to get them past the hump, a few grand a month, something like that.  Double down in helping them find them new roles.  Ask your VC for help in placing them.

    Partners & Creditors

    Before I write what I am about to write I want to make some things very clear.  Always do honest business and never screw your partners intentionally.  Your name is everything.  When you are starting to get short on cash talk to them and look for options, some will have experienced similar and will be helpful.

    So my first advice is preventative.  When you negotiate every contract, take it from the lens of “what happens if I run out of cash?”.  Can you terminate?  Can you adjust pricing?  Are the terms 30 days or 90 days?  Can they kill my business if I am short on cash?  Don’t bet on a long future and sign-up for 2-3 year deals.  Business flexibility is probably more important than scaling costs downwards off the bat.

    Once you are in the cash crunch situation, here is a golden rule I once heard “Pay your customers, not your creditors”.  I.e. in a world of limited money and limited choice of how to apply it, remember that paying creditors won’t result in your business generating cash,  it will result in your business dying and all your creditors getting $0.  You are helping your creditors by helping yourself (presuming you don’t spend it stupidly).

    The key date to remember when negotiating with any partner is their fiscal year end.  If you are past 90 days due on payments, you have to pay something otherwise your partner is basically forced to write you off as bad debts.  If you pay anything, they can keep it as revenue.  Also remember that if you have global partners that standards of non-payment are very different.  Payables past 90+ days may be more the norm than a “business faux pas” in certain countries.

    No matter what this is going to result in you hating your job for a while.  Negotiating and settling with partners is not fun.  Nor is stringing out payments.  People will not say very nice things to you.

     

    In part 2, I’ll look at customers & pricing, and operating your business once in the cash crunch.