I wrote earlier in the year about the challenges companies face raising Series B financings, and in particular how vulnerable companies are who have demonstrated potential but not yet converted that into a reliable, profitable revenue stream.
The issue is keeping an eye on your cash while continuing to develop the business, anticipating the next infusion of capital.
But what if you look at the business today and soberly assess that it’s just not going to get to where you expect or believe it needs to be: either to raise more money from an outside investor or to deliver meaningful value?
When do you make the decision to stop fundraising and use the remaining cash to wind the company down? It’s somehow easier to get to that decision point as an investor. You’re almost structurally set up to make that dispassionate call, not involved in the daily business, but fluent in the operations and the potential.
But that’s structure and theory. In practice you are very close to the business and to the management team. You’re spending tons of time with them. You invested in their vision. So unless the company has missed its milestones by a country mile there’s enormous room for debate, and ambiguity.
However a looming cash-out date sharpens everyone’s focus; there’s only a few short months until you’re out of money. Time pares down the alternatives until there’s just one.
What about companies who have enough money to keep going for a year or more, but whose business is just not performing? And what if you don’t expect it to? What if the shape and trajectory of the business is just not mapping cleanly onto a business that will deliver the potential you expect, or more importantly, that the market will value?
That’s a much more difficult call.
Are you better off acknowledging the futility, the wasted resources (money, time, career opportunity cost), and be deliberate about making a difficult decision sooner rather than later? The big issue is that in this market, unless the business is profitable, the likelihood of selling it is close to zero, and if you are lucky to sell, the price will be predatory at best. A few million dollars, maybe.
So, let’s say you have $5 million in cash now, and you’re burning $1 million a quarter. Do you spend $3 million and three quarters to see if you can get the company to perform to expectations knowing you might be able to sell it for $5 million a year from now if you’re wrong? Or do you just shut down the company at a cost of $1 million, and redistribute the remaining $4 million to investors?
That math is harsh, but what’s harsher is the economic climate that supports it. This isn’t a “present value of tomorrow’s cash” kind of problem, it’s more nuanced.
Are you better off giving the company the runway and time to try? And the employees another year of security and jobs? It’s that second part that in the past I think would have been easier to look beyond, but today, for me, it really becomes a significant variable in the calculus.
We’re in the business of making risky bets, and generally view time as an asset to develop options and deliver unexpected upturns; taking it off the “balance sheet” seems at odds with the whole ethos of our business.
But is that also a way of dodging the responsibility of making a tough decision? Avoiding the inevitable is different from preserving options.
How much more do you weigh these societal costs against a purely “economic” decision? In a growing economy, it’s so much easier to focus purely on the economics. In a growing economy people will get new jobs, some more quickly than others, but they’ll move on.
But in today’s economy it’s just not that clear.