A VC in Vacationland

I’m Having an Out-of-Money Experience.

I recently saw this slogan(check out Winston Smith’s poster above) on a t-shirt worn by a bored looking guy in Rome, accompanying his well dressed(read:expensively) girl friend/wife/mistress, who was headed into Prada.

It made me think of fund raising by start-ups and the pitfalls of waiting too long to secure money to carry out business plans. I must speak with one entrepreneur per week who is having some sort of out-of-money experience.  Oh, I know, you are saying, isn’t this what start ups are all about?  Not in my book.

Too many entrepreneurs are in denial about money issues, always having a good reason why they should not worry about where the next payroll will come from. This is a big red flag for investors.  I will not invest in a company in money trouble under an circumstances, even one run by a good friend.  To me, having an out of money experience is a sign of poor management at best and incompetence at worst. 

Let me offer a few suggestions as to why this is no way to run a startup:

1. Lean & Mean. A well thought out business plan and budget, with early customer acquisition and pilots, rapid release of software and tight controls over unnecessary spending (you honestly do not all need Aeron chairs) is the best way to manage any startup.  Only about 50% of the startups I see have this discipline.  The ones that do are the most successful.

2. Clear Financial Options. No one can predict all financing needs in a small company, but you better have options available before they are needed.  Like that line of credit you never seem to get around to. Having cash available in advance is a lot cheaper than pleading with your bank in a money crunch, or having to give your investors 100% warrant coverage to get a bridge loan.

3. Dialog with Investors.  This should be a constant process in all stages of growth.  You never know when you will need them.  Take all phone calls from VC’s , banks, PE firms and other potential investors. Initiate quarterly discussion with the ones you like the best, asking them about the state of the market and what financing options are available.

Every startup may have a short term money crunch now and then, especially when receivables are late.  That is a normal and expected part of business, one that a carefully drawn up budget should be able to manage. 

Just be sure that the crunch does not happen constantly and end up turning into an out-of-money experience.