We can’t raise money, what should we do?
This is such a common question among startup founders/leaders. The question is typically asked after several months of pitching every VC, family office, rich friends the founder knows. It comes after receiving feedback, iterating the pitch, augmenting the business model, working in the business and on the business and eventually landing in the same spot you were when you started the fundraising journey eight months ago. Now, a measure of reality begins to set in and you ask yourself, “What should I do with this business?” The answer is different for everyone given there are typically other stakeholders (co-founders, board, family, angels, etc.) involved that would have a say in the final decision. But quite often we ponder the question as if we’re trying to cure cancer. It’s not that hard! The answer to this question usually falls into four (4) buckets:
- Grow organically
- Continue as-is
- Sell the company
- Close the Doors
Now how you execute given the category you select is another question. But suffice it to say, these are your options. Let’s take a brief look at each and determine what’s right for you
What do we mean by “organic growth”? Organic growth is growth that’s generated by an increase of output….typically sales. Startups can choose to continue to grow organically at whatever growth rate they are currently experiencing. However, many ‘startups’ aren’t growing at all. They have more promises and employees than customers. I’d first ask these ‘startups’ to realize what/who they are…which is an idea trying to become a company, not a company ready for funding. I like Steve Blank’s definition of a startup. He says it’s a temporary organization formed to search for a repeatable and scalable business model. Many startups that are trying to raise money are simply too early for investors, even some angel investors. But hey if you have a few customers, perhaps you should continue to grow organically while devoting all of your energy to customer development in the hopes of finding true product/market fit.
This option is a bit different from growing organically in that your company’s burn rate may be outstripping your revenue. Simply stated, you’re spending more money than you’re making! This scenario would appear to make your decision-making easy, but many startups continue as-is with the belief that it’s possible to 1) hit an inflection point that spurs exponential growth. Often this inflection point occurs when a company achieves product/market fit. 2) build a solid user/client base and try to upsell this base to increase the average revenue per customer, or 3) try to monetize the customer base via some form of acquisition (e.g. sell your book of business). The key if you opt for the continue as-is approach, is you need to have clear goals so the entire leadership team understands the expected outcome and can organize their work effort(s) accordingly.
Sell the Company
This is a fairly straight forward option. You have a company, a few customers, a great team, some proprietary technology, and a few value hypotheses that still need to be proved or disproved. However, your runway is too short and you don’t have time to ‘figure it out’ or you realize that you can’t compete against larger well-resourced companies. So you opt to sell the company. This scenario has played out hundreds, if not thousands, of times in business...and it manifests in the form of an acquihire. The larger competitor sees the opportunity to hire a talented team and they purchase the company. Another option is the invest some money to build-out the technology thereby making the company more valuable in addition to the talented team. Still, it’s really difficult to time the market properly and sell your company. Tomasz Tunguz of Redpoint addresses this question and offers some directional data on when to sell your company by examining the relationship between growth and enterprise value.
Close the Doors
Self explanatory eh? I can’t tell you when enough is enough and it’s time to wind down the company. But four things you should consider when making this decision are:
- Data – Runway, product/market fit, customer feedback, sales numbers, etc. What is the data telling you?
- Employees – Always look out for your employees. They assumed some of the risk by joining your early stage company. The least you can do is attempt to give them a soft landing.
- Intuition – What does your gut tell you? Be honest.
- Tolerance – Building a business is a laborious, long process. You have to love the process more than the desired result. Can you tolerate spending more money and time on this venture? Only you (and your investors) can answer this question.
So make a decision and get on with your life and venture.