What if I am In the Middle of a Small Round to a Larger Round Later?

Many early stage companies are in exactly this place. This is especially true for companies that had initial financing needs that fell into the >$1.5M but <$4M. Many followed the recommendation to carve out a small round to achieve some milestones and then go after the larger equity round.

If this is you, the first thing I would recommend is to not panic. Panic usually implies “out of control” and you certainly won’t begin to solve the problem until you understand the options available to maintain control. It is time to re-look at your business, the tactics that you are executing, your anticipated results and your actual results.

You are going to hear the words “Cash is King” a lot for the next few quarters. So you need to get a hold on your financials and meticulously track them. Two critical elements to understand are “Burn Rate”; how much you are currently spending each month; and “Runway”; how many months worth of cash you have on hand or expect from other than investments. These are the starting points for control.

If you are planning to get an infusion of investor money in mid 2009, does this imply that you have sufficient capital in the bank to get you there? Are any of your expectations based on sales? If so, how do you think the economy will affect your customers’ purchase of your products/services? Make any adjustments in your planning rationale and then re-look at your Runway.

I think it is prudent to assume that finding follow on investment might take a year longer than you anticipated. So, the next area to take a hard look at is reducing your burn rate. Your really need to take a hard look at all your expenses and identify which are critical and which can be reduced or eliminated and under what circumstances. Everything should be on the table.

There are a couple of good slides that Sequoia used in their presentation:


You can see from these the perspective Sequoia is giving their portfolio companies. I think there are a couple of others I would add. One is to look at your cost of goods for products and see if there are ways to reduce or defer these costs.

Another is you might want to talk with your suppliers and see that they can do. Remember, they are planning on you contributing to their financial position. If you go out of business, it hurts them too. I have heard of a few instances where suppliers became investors to keep the business.

Overall, begin to think and breathe “Bootstrapping”. There are going to be lots of companies using this technique so you won’t be alone. You can bet that there will be lots of articles, conferences, and seminars on the topic.


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