The Race Against Running Out of Cash

Off to the Races, Part 4

Based on a study of over 1,000 seed-funded startups, running out of cash was the third leading factor resulting in company failure:

1. Founder conflict and misalignment – 65%
2. Lack of product/market fit – 42%
3. Running out of cash – 29%

I’ve discussed Burnout – the difference between motion and progress – in the previous installment, and how an effective action plan helps you avoid it. Losing the “Race against running out of Cash” is nearly always a result of not having a solid plan or not following it.

How to run out of cash fast:

• Developing a zippy logo
• Building a website before having anything to say
• Promoting your company on social media
• Registering the company
• Bringing on multiple cofounders
• Hiring prematurely
• Leasing an office

A startup is an experiment

The day you decide to start a business, you’re a founder, but it’s not a business until a customer pays for your product. Your priority is to know your idea has a chance before going any further.

Your hypothesis encompasses three parts; you’ve identified a problem that many people have, your solution is feasible, and you’ll be able to make money from selling it. Your priority is to prove that to be true or walk away.

As with my prior articles, I assume the company has one or two initial cofounders, limited founder capital, and is just starting to validate its market.

Founders often assume they need a business plan to raise capital. Pre-seed and Seed investors often accept that you don’t yet know enough to develop a detailed Business Plan.

Unless you plan to bootstrap your company, you’ll likely go through several funding rounds on your way to building a sustainable company.

Investors want to understand how you’re going to spend their money to develop the business and what it could mean for them if you succeed. Every round of funding extends your runway – how much time you have available to reach your next funding milestone. You can buy time, but you’re simultaneously in a race against competitors. Additional time might keep you afloat a bit longer, but it doesn’t stop your competitors.

With each round of funding, you should be increasing value, growing customers, and consistently hitting your milestones. If that’s not happening, it’s unlikely you’ll attract investors for subsequent rounds.

How to keep from running out of cash

The simple answer is to start with enough money to fund a short-term plan to bring you to your next funding round. Sounds easy, but I promise you it’s not. Developing an action plan requires significant work and a degree of soul searching. It’s the early stages of development where an experienced advisor, business coach, or mentor can add the most value – increase your odds while accelerating your program.

Seed Funding

The Seed Funding round is your first honest attempt at convincing an experienced investor to provide capital. If successful, you’ve separated yourself from most other startups to this point. Now is when things get real.

To start this round, you need to demonstrate:

• You’ve proven some degree of product/market fit
• You understand your market well and know your target customer
• You have customers who like and use your MVP
• You have a working prototype if your solution involves a physical product
• Proof that you’ve met your prior milestones
• What you’ll spend their money on and why
• You have the beginnings of a team, most likely another cofounder, and a clear understanding of the management gaps and a plan to fill them
• An ability to clearly articulate your market, solution, and preliminary business model
• You know your numbers

Seed Investors are typically Business Angels or, in rare cases, early-stage VCs. They want to know you have a large market and confidence that you and your team are up to the task. They can assess the market and decide if you have a viable solution, but their ultimate risk is management’s ability to execute.

Don’t start with an amount lower than you need to reach your next milestone. If you run out of cash before reaching the next round as planned, you’ll have a hard time convincing someone to provide what would be considered bridge financing instead of an investment. Seed round investors also have difficulty committing to founders that haven’t invested a meaningful amount of their own money along the way. Why should they take a risk that the founders have avoided?

Securing your Seed Round will allow you to start building out your company

• Start by drafting a clear description of the problem your product solves.
• Validate your market before anything else.
• No amount of hard work and investment can get someone to buy your product.
• You either solve their problem, or you don’t. You can’t know without talking directly to potential customers.
• Build your preliminary Business Model using the Business Model Canvas, starting with your customer value proposition.
• Once you’ve addressed each of the nine elements Business Model Canvas, you have a high-level view of how your business will land Customers, what expertise you’ll need to rent or acquire to execute your next steps, and the key activities you’ll need to execute.
• Build a simple spreadsheet that analyses your cash needs and timing.
• Factor in how much you are able and willing to fund personally.
• Your objective is to build a plan that will give you the information and confidence you’ll need to progress to your seed round.
• Don’t take the view that you’re doing this for an investor. Seed Investor questions are ones you should be asking yourself before you decide to move forward with the business.
• Think of your business as an experiment during this phase of development. You are working to prove your hypothesis.
• You might need additional market research, or bring on a co-founder with complementary expertise.
• Maybe you need to build a prototype of a physical product or a beta app.
• Perhaps you need computers or other technical assets.

Your action plan is your roadmap

Understand the specifics of your market, industry sector, and the realistically available funding options before choosing your path forward. Only a small number of startups get VC funding. If your company can’t scale rapidly, or if you need to remain in control, or if you are in an industry sector that doesn’t interest them, don’t waste your time chasing them.

Over 95% of existing companies didn’t need VC investors to succeed. There are other options available to meet your objectives. Knowing these in advance will keep you from planning a route with dead ends and keep you from burning valuable time and money.

If you are in a sector where VC funding is required, primarily tech, AI, and healthcare in today’s environment, build your plan to be VC-ready. Research their investment mandates and focus your strategy on Funds looking for the opportunity you offer.

Know your funding options before developing your Pitch:

• Physical vs. Digital Tech have very different funding options
• If you intend to stay in control of the company, an action plan that includes VC funding won’t get you there
• If your business can’t scale quickly, most VCs won’t be interested
• Strategic Joint Ventures, Product Licensing, and outsourcing can make perfect sense for some industries but aren’t an option for others
• Find an advisor to help you understand your specific options from the start rather than waste time and money heading towards a dead end

Up Next

In my next installment, I’ll write about “The Race against Competitors (Known and Unknown)”

Meanwhile, I suggest you check out the following related posts by other members of our team:

• Ten Big Questions: What Investors Want to Know
• Most Startups Don’t Need Investors
• How and Where Do You Find Angel Investors?

Off to the Races Series

• Introduction (Part 1)
• Burnout (Part 2)
• Market Dynamics (Part 3)
• The Race against Running Out of Cash (Part 4)
• The Race against Competitors (Part 5)