Preparing for Stormy times

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The current climate for fundraising and exits can only be described as great. Slack, the latest $1B unicorn just raised  $ 120M  in funding  at a $1.12B valuation. Pretty crazy for a company with annualized revenue of $12M! And corporate buyers continue to have a strong appetite for acquisitions. Yahoo! on the strength of Alibaba’s IPO has approx ~ $10B in cash and will likely to accelerate it’s pace of acquisitions. All good, right?

Thing is, capital markets go in cycles. Bull markets (when times are good) typically last 4.75 years. We are well into year 6 on this one. If you check out the NASDAQ composite index (which is heavily tech-weighted) over the past 5 years, it’s pretty much up and to the right.

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Nobody seems to think that we’re in for another 2008-like downturn. Back then, LPs (the investors that fund VC funds) stopped honouring their commitments to those funds and VC funding all but dried up. However, our economies are all linked together. And potential economic issues in Europe could impact stock markets here in N. America.

Several of the Valley’s elite, including Bill Gurley and Marc Andreessen have weighed in on the risk of the current frothy climate.

I won’t duplicate their efforts. But what I’d like to do is talk about is what you should do to prepare your company is the dark clouds do come.

The best defence is a good offence

The Slack funding is a great illustration of the first thing to consider in preparing for stormy times: If you can raise now, you probably should. Times are good. If you have traction and growth, go top up the bank account. In my experience, funding slows down after US Thanksgiving. But now would be a great time to prep for a funding event to kick off in Jan. 2015.

Maximize iteration cycles

If you don’t yet have the traction and growth needed to easily fundraise on great terms, then you need to manage runway (when you run out of cash). Remember, the reason why startups die is they run out of cash. You can keep going and keep iterating as long as you have cash in the bank. To me, when you’re pre-traction, runway is measured in terms of number of iteration cycles. Not time. How many times can you collect feedback and iterate till you find the thing that works and will drive growth?

Separate long term from near term investments

Most startups spend their money across two vectors: i.) The spend needed to generate this year’s results; and ii.) The long term investments in platform and other areas that drive future results. Now, you need both. But sometimes there’s a case for slowing down on #2 if you’re worried about cash.

Debt

This is related to the first point. Times are good for raising capital of all kinds. If you have VC backing and still have a decent amount of cash, you might consider venture debt or other debt instruments. If your balance sheet can support it, debt can be a quick and non-dilutive way to top up the bank account. Lenders like Silicon Valley Bank are coming up with new debt products. One I like a lot is a line of credit based on future recurring revenues. If you’re a SaaS company with predictable churn you can get an advance based on future billings.

Keep close to your current investors

This applies in good times and bad, but if you think you may run out of cash, your most likely funding source is your existing investors. So, make sure you keep them close. Keep them regularly updated on progress. And at both the board and investor levels, talk openly about whether you have the milestones needed to raise an external round (one led by a new investor). If not, have explicit discussions about whether the current investors will bridge you if needed. If you don’t have the milestones the worst thing your investors can do is force you to go out anyway and try and find a new investor. It will be an uphill battle and the time spent fundraising will make it even harder to hit those milestones.

  • Lally Rementilla

    Well done and timely, Mark. Based on some discussions I’m getting from other tech CFO’s making sure the foul weather wear is laid out, stocking the pantry and readying the winches are very prudent moves. I used to race keel boats so thanks for bearing with the sailing analogies. I would add that tech CFO’s should get together or at least reach out to each other to see what we could also do to help each other out.

    • Definitely agree on collaborating with peers Lally. Trying to predict the future is difficult. So seeing how other CFOs are preparing is useful