Fundraising 2016 – Control Your Destiny

Welcome to 2016. We’ve already heard lots of predictions about the late stage financing market, tech IPOs, and what is going to happen to unicorns this year. And it’s only Monday, January 4th.

Remember that these are predictions. No one really has a clue. And a year is a long time.

My simple advice for 2016 is “control your destiny.”  There are lots of different ways to control your destiny. It’s dependent on the stage you are at, the size of your company, and the configuration of your investor base.

Here’s an example from an email exchange I had this morning with the CEO of an early stage company that has growing revenue and a small team.

Founder: “So far we’ve raised $1.2mm and our revenues for 2016 will eclipse that. (All software licenses sold, no services). With status quo, we can become profitable, but grow slowly. I can burn faster, and grow faster, but risk not being able to raise money. There are network effects and winning the market is important. If my end goal is to ultimately win the market and not stay a “nice little business” is there any rule of thumb for how much to burn versus keep in the coffers? Is it better to burn out, or fade away?” 

Me: 1. How much cash do you have in the bank? 2. How much are you burning a month?

Founder: 1. $250K actual cash. $250K in A/R. 2. $65k / month

Me: Get profitable so you are self-sustaining. Then raise more money.

Founder: Thanks!  I think you are right. Love to know your reasoning.

Me: Control your future. It makes fundraising much easier.

I’ve got plenty of different examples for different situations and stages. Look for more examples like this in the future. If there are specific cases you are looking for feedback on, feel free to leave them in the comments.

  • Did you see my comment on Fred’s blog 4 days ago…

    I’m thinking we are the same age 50ish. I had a conversation with a young founder the other day and said that until you were profitable you don’t really have control of your company.

    He looked at me proudly and said: “I own 60% of my company, I’m in total control.”

    I said great are the other 40% common shareholders like you?? or did you sign a two inch thick book with terms to protect them for their 40% share??? Ummm…

    Think if you need to raise money there is a possibility the terms will be you need a new CEO, and many of your common shares will get crammed down??

    “Well I wouldn’t raise money under those terms”. Ok, if you are profitable you are right but if you aren’t profitable and the alternative is to raise money or die which are you going to choose?

    Also I gave Seth Levine a shout out for class and dignity in that company that had to be shut down last month. Class move.

    • Thanks on the shoutout for Seth.

      And – your feedback / questions to the founder were exactly correct. And a lot of people are going to learn that lesson for the first time this year.

      I just turned 50 …

    • It always seems to come back to… Live to fight another day.

  • JLM

    .
    The issue of founder/entrepreneur control is a paramount concern on the balance sheet, the cap table, and in the board room.

    It is the most important element of CEO survival.

    When the VCs want to fund the next 12 months, the smart entrepreneur gets 24 months of money and lengthens the leash while increasing flexibility.

    When the VCs want a disproportionately greater representation on the board, the smart entrepreneur gives them the number of seats they want but increases the size of the board to ensure she retains control. Every CEO should attempt to control their destiny at the board level.

    The prudent CEO submits a clear vision, mission, strategy, tactics (financial plan), objectives, values, culture, business engine canvas, business process graphic, and dollar weighted current and future org charts.

    She gets it all approved in writing by the board and then goes out and executes having the control of her destiny at all times.

    Control is a very good thing and when you lose it is a very bad thing. But you have to seize control. It is not really given to you.

    It took 33 years of CEOing to learn that lesson. Its yours for free.

    JLM
    http://www.themusingsofthebigredcar.com

    • And – control is elusive and often poorly defined.

      • JLM

        .
        Not really.

        Control means having a majority of “friends” on the board.

        Control means having a battle tested and reasonable plan or working toward one.

        Control means having a realistic set of expectations between management and the board. Communicating timely and accurately while listening closely. Having the humility to listen.

        Control means running a profitable company or having enough money on hand to get there if not.

        Control means getting to work early, staying late, working through lunch on occasion and knowing what to do when you get to work.

        Control means having your integrity intact and your honor in place and being able to be proud of your vision.

        Control means knowing who you are, from whence you have come, where you are headed and treating people with dignity and respect on the entire journey. Everyone.

        Control means knowing what you know, knowing what you don’t know, and knowing that there have to be things you don’t know you don’t know.

        JLM
        http://www.themusingsofthebigredcar.com

        • The biggest thing I hear entrepreneurs cry about is “losing control” of “their” company.

          I.e. getting replaced.

          All your comments spot on.

  • Statements of cash flows are should be taped to the armband of every quarterback founder

  • I cannot stress how important financing A/Rs will become in the next 6 months.

    Cash is king.

    – Founder who runs huge float.

  • 2016 will be the year of becoming profitable or withering on the vine. Total destiny ownership particularly as we see more mid-sized companies being built aka $30-50m annual revenues

  • Excellent post. The single best way to control your own destiny is to have cash in the bank.

  • Question: does your answer really look at the valuation? If they’ve raised $1.2M and they have $250K in revenue is it just clear that the higher valuation needed to raise again isn’t there yet?

    With my own startup we’ve been running extremely lean but often I worry that I’m being too conservative and undermining how valuable of a company we could be building if we stepped on the gas more.

    Have you seen many startups that have just stayed too small for too long or is it just so much more likely that they die due to a high burn rate after raising money?

    • I depends on a number of factors, including the specific business. Remember the question – should I burn more money and potentially slam into the wall while trying to raise now (on limited runway) or should I get cash flow positive (in the next few months), grow somewhat slower but with higher probability, and then go raise money when I don’t have the pressure of slamming into the wall …

  • Nice post, thanks for sharing.

  • StevenHB

    I assume that you had more information than you included in your summary. If winning the market is important, perhaps growing more slowly while becoming profitable would allow someone else to win. Seems to me that timing is important for this entrepreneur.

    • Not really. I don’t believe in the “winner take all” theory. I get that some do. I think there can be two big players in each market. And – I think that the idea of massively spending money to gain market share before someone else shows up is often a flawed approach, especially when the market suddenly tightens (like it just did) and values – well – value – over growth.