Entrepreneur Tips and Discussions

If you’ve raised VC money, have you had THAT call with your investors yet?

I’m curious because the number of friends I’ve had report back to me that VCs are in portfolio panic mode is shocking. We did this in 2000 and it was the most painful experience of my career (sitting down with 10 companies and deciding which ones stayed and which were given the Old Yeller treatment).

Angel money will probably ride this out, but VC’s are a skittish bunch. So, if you’ve had a talk and are being asked to curtail expenses, slow burn rates, etc, etc. share your story.

Good luck to everyone.

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16 replies on “If you’ve raised VC money, have you had THAT call with your investors yet?”

We signed a deal with an investment group back in October for $1mm to be tranched out according to an approved strategy plan. They told us that they didn’t want us to worry about cash every single month like we had been doing for the previous few years.

We built the strategy plan and got it approved by investors.

They immediately fell behind on the funding tranches. We were still worried every single month about making payroll and other expenses. The investors got frustrated with the management team when we simply asked them to meet their commitments.

When the stock market tanked, our investors were $75k behind on their agreed investments, with another $200k tranche due April 1st. Our runway only extended to the 3rd, so we really needed them to meet those capital commitments. They called to tell us not to expect any more money. They were unable to raise more from their LPs (which is telling: they basically committed money they didn’t have).

After a good deal of fighting, we got them to agree to fund a hibernate plan. Lay off everyone but absolutely essential engineers. The layoffs included the founders but we were able to keep five people employed. It was better than nothing. The idea was to resurface once the dust had settled on the global financial calamity.

Now the investment group is asking to restructure the board because the founders are the majority and to them “that doesn’t make sense because the founders don’t work for the company anymore.” Obviously, this is a non-starter because they will structure any future raises in a way that will screw over the founders and previous investors.

So, yes, we’ve had THAT call.

We are doing it with some portfolio companies. I don’t view it as panic mode. It takes a leader with an irrational sense of optimism to start a company and persevere to build it. That same optimism will drive the company straight into the toilet when revenues fall away due to a recession and the CEO isn’t decisive in cutting when they have first visibility – vs sticking with the optimism they’ll hit now unrealistic numbers.

Call it paranoia that the bull run would end, but we started doing this last year (post-Series A startup). Had some difficulty raising a Series B last feb (in hindsight it was too early) and at that point realized continuing to bank on raising more money was foolish. Got our burn *way* down yet kept growing. Ended up doing a smaller internal round which was actually preferable anyways, and as part of it we all agreed that we would get and stay at breakeven and operate as if we might never raise more financing, so yea I think our lead investor on that saw the writing on the wall. From founder to founder, having that burn in a much more manageable place and not relying on raising more money or fickle VCs in the next round is an incredible feeling and, if anything good comes out of this crisis, it’ll be investors and founders being more aligned on keeping burn reasonable.

I actually wonder if this type of operational strategy won’t increasingly be a hiring advantage. Many talented folks are tiring of working for companies operating on a knife’s edge from a financial standpoint. I’ve experimented with making this a part of our hiring strategy and it has resonated. Something to think about.

We are working with our portfolio to balance burn with revenue moving out. Also using it as a chance to take a fresh look at the structure of the business and the funding roadmap.

Personally I quite like these economic bumps (not the human cost, which is terrifying). Bootstrapping, lots of changes to the market, big organisations unable to change fast enough, lots of people with time on their hands to engage…it’s a great time to grow value.

I’ve spent the past few days talking to CRO level people and sales leaders as well as VC fund operators.

From what I have gathered there isn’t a freeze and I’m not freezing. There is a review. What was a viable option in January might not be today. What wasn’t viable in January might be viable today.

We always do this in massive market shifts. This is not a good time to say this but right now is a tremendous time to make money and hitching your wagon to to a technology better prepared for the climate we’re going to have in the next year is where we’re going to make it.

So I know funding is being reviewed and there will be shifts and some won’t make it.

Been at this shit for 25 years. Nothing new here. Follow the fundamentals.

This whole unfortunate crisis is actually helpful to my particular business, so as bad as it feels to benefit off of a negative situation, our immediate revenue projections are basically 10x what they were before. A huge global brand called us up Monday morning to sign up. Again, I would much rather this didn’t happen for the sake of the hundreds of thousands that will die (potentially millions, tens of millions says my brother who works for the US gov) but it has definitely helped. This will make further fund raising much easier, especially since most other startups are on fire right now.

I consult with a couple of startups to keep cashflow while I build my own business. Each one has had some sort of call from their investors regarding money. The investors are either asking them to reign in spending or telling them not to expect any more cash infusions for the foreseeable future. One startup is suspending operations – their hardware-enabled product is focused on saving people time around the house, and they’ve seen user rates tank since the start of the pandemic.

It’s really a time to embrace a lean startup to extend runway. It is important for founders to not depend on having to raise in this environment (esp if it gets worse) and sure up the balance sheet. Cut unnecessary expenses; it is hard to fire employees but it is a good time to evaluate the amount of value specific roles and people bring to the company.

Our investors are behind us, and we’re confident we can ride this out. But we don’t want to burn through more cash than we need to in the interim, so when things pick back up we’ll have the capital to throw into marketing and growth.

We’ve been going hard on driving down costs, and trying to avoid anything that would end up hurting is in the long run. That means some tech projects are still going ahead, while others will be delayed until things improve.

Marketing spend had been cut way back to a fraction of what it normally is. Many external services have been put on hold or cancelled. And we’ve been contacting all our suppliers asking for temporary discounts, worth reasonable success. We were already pretty lean, but we’ve managed to get our costs down further by about 30%.

We’re also looking into possible opportunities to create new revenue streams while our core business drops off.

But we’re lucky. Our offering is likely to be back in even higher demand when the worst of this is over. Our costs were already quite low compared to many other startups we know, particularly our fixed costs. And we’ve got great investors who have faith in the business. Unfortunately we have friends at other startups who are unlikely to get through this with their startups intact.

Hey, I understand you’re approaching this pragmatically. You also mentioned that you didn’t read the full comment history, not to mention that you aren’t involved in this so you don’t know the full story. But the question of “why are you mad” seems pointlessly contrarian when you at least know that the investors failed to fulfill their contractual obligations and it resulted in good people losing their jobs.

Yes, it could always be worse. Yes, the world is not fair. It doesn’t mean you have to be some stoic monk when a bad thing happens to you.

I know that this line of thinking won’t resonate with you for a number or reasons, so let’s just end the discussion here and move on to more productive things. Have a good day.

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