Money makes the startup world go ‘round. But money tends to run out fast. One of the common problems startups face is just that: running out of money. In the back of every founder’s mind, there is a countdown to running out of money. In investor speak, this is called “the runway”, that is, the cash balance in the bank divided by the startup’s monthly burn rate. The runway tells you exactly how much time is left before you need to close shop.
The real cost of raising money – your time
The rule of thumb is that raising a new round of capital takes an average of six months. This might be ok when it’s the first round of capital because the founders may still have salaries from other jobs during the road-show and spend is usually very low.
However, this time-frame is very problematic when it’s the second or third round of capital. Why? For several reasons:
- The startup’s resources are diverted to the road-show. This slows the operations of the startup, which in turn hurts its chances of successfully fundraising. A real catch-22. You fail to raise due to the lack of progress during fundraising.
- Demands from investors are more stringent. It was ok not to understand what investors want and need when you just started out, but for your second round, you are expected to show KPIs that are relevant for investor decision-making, i.e. “talk the talk”, have a clear indication of where you stand vis-à-vis product-market-fit, and present professionally. When you focus on day-to-day startup operations, often preparing this information clearly and succinctly is ignored until the last minute which adds two-three months to the investment process.
- The instability seeps into the company culture. Hiring talented people is easiest when the startup has money in the bank to pay salaries for at least one and a half years. As time passes, people who work for the startup are risking that the fundraising will fail or be late, which means getting let go, or suffering a salary reduction, or not getting paid on time. When people start fearing for the future, panic grips the organization and becomes part of its culture.
- Reality trumps “the plan”. Milestones and financing plans make a lot of sense when they are created. A typical timeline posits 18 months of capital runway post first financing. Twelve months are used to reach the next funding milestone, and six months are used to raise the next round of capital. This works if everything goes smoothly and on time. Things never go smoothly or on time. A common adage of investors is that reaching the milestone takes twice the time and three times the money.
Want to avoid running out of money? Work differently. Start sooner (that means now!). Seek outside assistance.
Starting sooner
Many fundraising activities can already be done immediately after raising the last round of capital. This means that operations are working in parallel to the next round of fundraising from day one. Examples of fundraising preparation include strategy, business planning, documentation, milestones, validation, team building, pre-marketing, and investor relations.
By continuously doing these activities from day one in parallel to operations, you gain four major benefits:
- You save time
- You dive deeper into each item slowly improving over time
- You are ready to fundraise at a moment’s notice
- All decisions are focused on what is really important – closing the next round
Seek outside assistance
Another way to avoid wasting time and resources (and eventually running out of money) is simply to hire professionals who specialize in investment banking to be dedicated to this work from day one. In this way, the resources of the core team can focus on the product, and the financers can focus on the money.
A funding-dedicated team can prepare for investors as above, and also start a dialog with investors, ones with whom they already have an ongoing relationship, about the startup. The investment bankers and startup founders then learn what the investors’ objections are, how they view the market, and if they have similar companies in their portfolio. All this information is valuable as it saves time, enables focusing on the relevant investors, and improves the pitch.
So what are you waiting for?
The Lean Canvas is a popular term that everyone is using.
If you would put the Israeli entrepreneur’s DNA under a microscope you would find a results-orientated chromosome rather than a process-oriented chromosome. Don’t believe me? Try managing Israeli’s and then lets talk. Israelis thrive under high-pressure deadlines, not under what they consider to be bureaucratic processes.
One thing:
