Funding your startup in desperate times
Pretty much everything written about funding your startup - especially VC and equity investment - assumes you have two things:
1) Time - at least 6 months before you run out of cash
2) Money - as in sufficient cash already in place to give you the luxury of choice and to support the logistics of getting money
I don't see quite so much being written about desperate down rounds, taking yourself and your colleagues off the payroll and those back against the wall loans that make you sick to the stomach. And yet most entrepreneurs I speak to have faced or are facing, situations of financial, existential crisis where they have neither the time nor the money to make any good choices.
It's almost like that doesn't fit with the sexy startup mythology.
The hard truth is that financial desperation can be a powerful signal from the universe that your startup has run its course, or doesn't deserve to live in the first place. I'm not a believer in "never give up at any cost" - I regard that as inefficient and a waste of potential. Sometimes you have to move on. Not every great idea makes a great business and maybe your next one will be better. If you are the only one in the universe that can see your vision after 10 years, that probably makes it a delusion rather than a vision.
Be brutally honest with yourself before proceeding into desperation funding territory. Do you really have a business? Is pushing on really worth the cost?
I do believe that desperation funding is not only doable but absolutely the right thing to do when your startup has earned the chance to live another day. When short-term survival doesn't just put off the inevitable for a few more months but allows your company to survive then eventually thrive, then it makes sense. For example you have a committed team capable of getting stuff done, fast. You have any kind of working prototype that someone has bought or expressed credible interest in buying. You have paying customers. You have some kind of protectable IP, asset or growing market awareness. You have existing investors of any kind. You have something more tangible than an idea living only in your own head.
Still here? OK. Hold tight. This ride will be rough and will probably make you feel sick.
"Tip to aspiring entrepreneurs: if you don’t like choosing between horrible and cataclysmic, don’t become CEO"
The difference between planned funding and desperation funding
Planned funding takes 3-9 months, especially at your first round and seed/series A. This is not just true of angel/VC funding, but also crowdfunding, grants and big money competitions like Scottish Edge. It is all consuming for the founder/CEO. So, if the money left in the bank can only keep your company running for a double-digit number of days - that's 10 to 99 days for the numerically confused - it is now far too late to start a planned fundraising process. You need desperation funding to buy you time and probably as a bridge to planned funding.
You must concentrate on this short-term goal, and not the big picture. No "here's my lovely slide deck and vision for the next two years" that goes with planned funding. You have to focus on "here's how we survive until April, at which point we may have the luxury of planning again". For anyone wondering, what happens if you only have single figure days left (yes, that's 0 - 9!) Don't worry. In that situation of utter dire desperation, you can't even think the word planning, let alone say it. So you will not make this mistake.
There are two types of desperation funding modes and they depend upon the stage and scale of the business. The first cash crunch - common of very early stage startups and those who do not have external investors - is usually your or you and your co-founder's problem alone. On the downside, it is your problem alone. On the upside, your cost base and payroll are unlikely to be that high, so it may still be solvable. The other type affects companies that have investment and a bit of traction. On the downside, anything you can do at a personal level is such a drop in the ocean that it won't help. If your payroll is £50k, sticking it on your creditcard like you did in the early days is not an option. Even a £30k bank loan will hardly touch the sides if there are not some other funding or revenue sources in the mix. On the upside, once you have investors and directors, this is no longer your problem alone. Ultimately the company is no legally allowed to trade insolvent, but you are more likely to have other people around you who can help if they choose to.
Cut costs and limit all money out
Very early stage startups are often running so lean, there is literally nothing to cut. No wage costs, no software costs, nothing to cut. But it is amazing how, once you get to 5, 10, 15, 25 people, once you've done a round or two or have some revenue coming in, stuff creeps in that you can live without - yet don't. The day you hit 180 days cash left, start tightening your belt on all the non-essentials - desperation funding is rapidly approaching.
I'm not talking some frugal hell where you stop buying tea bags and milk. I'm talking software licences nobody uses. Cloud instances that were set up for a demo and then never shut down. Subscriptions to stuff no one reads. Trains and planes that would have cost a fraction of the price with some forward planning. And, yes, I am also talking about "that person". You know the one. The one you've been avoiding dealing with. You have to deal with them before the real crunch comes because you will need your very best people by your side when things get really rocky. And for everyone to feel and be invested in making it work, the business mustn't be carrying passengers it can't afford and more importantly who don't care.
The other reason why you have to deal with poor performers and low contributors as far out as possible is that if it gets really rough - as in so rough you have to lay off good people and shut down worthwhile projects - those people have to know this was your last resort, the least cataclysmic choice amongst very limited horrible choices. Your fail, not theirs. This is not an "opportunity" to shed a few stragglers - that should have been done long ago. This is when you cut the company down to the bone by removing all non-essential people, however good. In all likelihood this means the CEO/founder taking over all sales, finance and business - and coming off payroll. A good product manager picking up everything from sales, customer on-boarding, technical support, testing, project and product management. And only retaining the minimum necessary technical people to build/ship committed product and whatever the heck you just committed to selling. You cannot afford to hire or keep expensive sales people (in my view).
Sell something, sell anything
Having told you to let go of your salespeople, now I am telling you to focus all your energy on selling things. Letting go of good people is your last resort, whereas selling is your first. Preferably with very low internal costs of sale - which means you and any able, available resources doing the selling.
"But Vicky, doh, I don't have anything to sell - that is why I am in this desperate funding situation and why I need money now, so I can make something to sell...."
Trust me, I'm an entrepreneur. You always have something to sell. Your time, your expertise, some of your team's capacity, something you haven't built yet, your patents, your soul (just kidding on that last one). This will be disruptive, hence it being an act of desperation funding and not your general strategy, but sell anything, including time sharing your team. In a very early iteration of my last business, my tech team was time-shared from another company. That entrepreneur was facing short-term funding challenges and couldn't afford to pay them full time, and didn't want to lose them if he could help it. I bought them for two days a week, which was all I could afford, and for a few months, it worked well for all of us. Similarly, this time around, I have created a new company to sell what is immediately available to me (time, wisdom, workshops etc) to fund me as I plan my next business.
There is usually always something you can sell. The far harder trick is to ensure that the servicing of that sale doesn't take your business to a place it can't get back from or muddies your offering to the extent that all future value is seriously compromised.
Philanthropy and paying it forward
If there are people in your life who like you and believe in you, chances are there are also people willing to help you survive this - as long as:
a) you ask
b) your ask is of an appropriate scale to their personal means and the goodwill levels of the relationship
c) you do everything within your power not to let them down (but still ensure they fully understand there is a risk this won't work).
As much as you need cash (it is hard, but not impossible to barter with the taxman for example), what do you really need the cash for? Can you skip the money bit and ask directly for support towards what you need? (Provided what you need is of desperate importance to your companies survival). So the ask may not necessarily be for direct cash, in fact, people are often more likely to help you if you ask for help in kind. For example, a former client of mine and lovely entrepreneur once paid for my plane ticket to go to New York and pitch at an important event. I know another entrepreneur who advanced payment for a short run of prototypes for someone else, and someone else pleased to advance someone the computing equipment they needed to get their agency off the ground.
Asking me for £10k via LinkedIn simply isn't going to cut it. Making an important deal happen for someone I trust and who has consistently impressed me? Hell yes.
Debt, advances and invoice financing
When you have no clients, no invoices out, your personal credit is maxed out - then loans are very unlikely to be an option that is available to you. But for an existing, revenue-generating business facing a cash crunch (even if the business is not yet profitable) debt is often a choice, even if on unpleasant terms.
There is the bank - even at a fairly early stage (though post-revenue) I took a £20k loan to bridge the business through a shortfall, but it was combined with other sources. It came with unpleasant terms, including personal guarantees, that remain a source of tension. If you have two years profitability behind you, you may be eligible for one of the peer to peer funded debt products, like Funding Circle. (My last company was not eligible when I looked into this, but it depends on the lender and your circumstances). If you are an ecommerce seller, there is advance payments/loans against likely revenue - like PayPal Working Capital, where you repay as you get paid.
There is also invoice financing, sometimes called factoring. If you are eligible (in that you sell a tangible product or service and have invoices out to a credible customer) these companies essentially buy these invoices from you at a discount. It isn't cheap - you may pay 20-25% of the invoice value for the service. But this desperation funding is never fun and rarely do you get too much choice.
Deals with customers and suppliers
Payment terms games, asking for and calling in favours is not a trick you can play too often - but provided your desperation is occasional and time-limited, then this can work (and was certainly the only reason my last company survived turning down investment with £200 left in the bank).
Talk to your accountant (even if it costs you) because your accountant will advise you exactly how many days late you can be paying certain things before the automatic fines are triggered. Talk to your suppliers, don't scare them, but asking to break up an invoice into instalments might be doable. And finally, chase down all monies owed, even if the payments aren't due yet. You have way more chance of getting paid early by asking nicely than hiring a heavy. But if you have bad debtors, people who have got away with not paying by assuming you won't get heavy. Get heavy.
Your board and existing investors
If you have board directors and existing investors, your financial problems are their financial problems - in the case of the board directors, quite literally. Not only will you need their consent to access things like debt anyway, more importantly, you are in this together. So if you believe the business is viable (having been brutally honest with yourself) and they believe the business is viable (if they don't, your next steps are likely some kind of winding up proceedings) whatever you do next, they need to be part of.
They may be able to lend or re-invest, and do so willingly. They may choose this moment to twist the knife in deep and hard and take you for almost all you have. This is where your previous choices around investors and directors will come back to haunt or help you. Most experienced investors know these things happen. If you can show your business is viable and you have a clear plan for what you need and what happens next, it is not unreasonable to expect that your investors will stick with you. Just beware that the relationship and terms of engagement are likely to change.
What you absolutely do not have time to do
Entrepreneurs are generally ridiculously optimistic and opportunistic people, confident they can think or talk their way out of most situations. But the problem with desperation funding is your time and options are horribly, horribly limited. Not only are there rarely any good choices, the normal playbook does not apply. What you don't do, will determine if what you do actually succeeds. Because you have very few rolls of the dice left. As ever, this is all my personal view, including the slightly controversial bits! Here's my take on what not to do:
Even think about a big formal fundraising round. Forget the pitch circuit, don't take that meeting with a VC waiting to see more traction and step away from Crunchbase and AngelList.
Plan a crowdfunding round. This is a complex thing, it takes preparation. As Anne mentions in the podcast episode accompanying this post, it takes at least 3 months to plan a crowdfunding campaign and you need to have 30%-50% of your fundraising in place when you start, to really get momentum. Not an option if the wall is fast approaching.
A new, complex grant application. I love grants. I'm very good at getting them, but they take at least 8-12 weeks to apply for properly and then they pay retrospectively (as in spend first, claim back). They will not help you if you have cash issues, and if you have grants underway, there is a risk these will be suspended and repayment requested if you are entering into insolvent territory.
Pin all your hopes on a pitch competition. By all means, do them if they're not distracting and they come with a big enough cash prize in your time-frame to be worth the punt. But it's funny. You tend win everything when you're already winning and when you're desperate it shows and you lose and just feel even worse. I avoid them if I'm in an emotional trough or really really need the cash.
Go to a new region, country, market. The grass may indeed be greener on the other side, but not only can you not afford the ticket to get there, you can't afford the time to learn all the new things you'll need to know before you can extract cash from that market.
Hire a new hotshot salesperson with a legendary black book. Do not "invest" your last remaining cash in a silver-tongued salesperson claiming to be able to save you. Do your own sales work. If you cannot sell this as founder, how the hell will someone new and expensive who doesn't know your business or customer yet? Do not even meet with salespeople while desperate. And do not let your board/investors waste your time insisting you meet them until you are out of financial peril.
Spend the last of your cash on a lottery ticket, plan a robbery or do other daft/illegal/harmful things. OK, play poker if you insist, but only if you're really really good and have a few discrete card counting techniques that won't get you arrested. But do not follow the example of my incubator alumni and I who were all so broke we clubbed together for a stash of big prize Euro-lottery tickets and then didn't win. (Entrepreneurs, endless optimists...) Group financial despair turns out to be even worse than solo financial despair. And with group desperation, no one can afford to get the drinks in.
Plenty of us have done desperation financing and survived to tell the tale - even if the shadows of those decisions end up being long and dark. You do what it takes to survive to another day. The prerequisite has to be that your business is worth saving - in other people eyes, the eyes of your customer, not just yours. Even if it is, that doesn't mean you'll necessarily succeed - but it should put the fire in your belly that you'll need for the fight ahead.
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This post expands on some of the themes raised in a conversation between Anne Ravanona and myself in Episode 8 of the Entrepreneur Agony Aunt Podcast - Funding for Startups Who Aren't Unicorns. We cover debt, equity and the various funding options available for smaller or non-VC fundable businesses.
I made a comment that "None of this applies if you are desperate. If you back is against the wall your options are incredibly limited" and so I decided to use this blog post to develop and expand on what those desperation options actually are.
If you have a leadership, management or startup question or problem, submit it here, and the Entrepreneur Agony Aunts will get stuck in.