A VC in Vacationland

There is an expression in the venture community that every fledgling entrepreneur needs to take to heart.  "Buying a vowel", popularized by the TV game show, Wheel of Fortune, often emerges in a partner meeting where new investments are under discussion.  One partner says, "We need to buy a vowel" on company XYZ, meaning we need to wait a couple of quarters to see if their performance lives up to their business plan.  The other partners nod their heads and they move on to the next company under consideration.  Sometimes they revisit the investment in a few months, more likely they do not.

Often, this is because the partners are suspicious of the company’s forecasts for client acquisition, product introduction or financial performance.  Many entrepreneurs wait too long to raise money. And you can smell the fear in their cash flow forecasts.  Why did they wait until they were about to run out of money to start fund raising again?  Who knows, but it is a very frequent occurrence.  I had one entrepreneur recently tell me that asking him to wait a month for a meeting was an "eternity in entrepreneur time".  When I asked him why, he admitted that he was out of cash and need an infusion immediately.  Next….

What’s the message here?  Plan your funding campaigns well and as much as possible have them conform to good times at the company.  Don’t wait for trouble to raise cash.  It will not happen. No one wants to fund a problem child.

I realize that this is easier said than done in most start-ups.  One, it is said, never knows when bad times might strike–a client delaying signing can kill a quarter, or a problem with software QA can hurt a launch (and revenue flows). This can be true, but when I have looked at the events leading up to such crises, it is often the case that the bad outcome could have been predicted months before.

I was recently tangentially involved in a highly funded start-up(not my money) with previously successful executives at the helm.  Scheduled to launch last October, the company’s success depended on significant pre sales to customers in the second and third quarters.  But nobody was seriously selling and the sales guys took extended summer holidays.  With no revenues in the bank, the company ran out of cash in early October.  The backers, well, backed out.  They said they were "buying a vowel", but in this case that meant firing all the employees and putting the product in suspended animation for a few quarters while they figured out what to do, if anything, with the concept and IP.

The learning for entrepreneurs is to do a really good job managing cash flow and the timing of fund raising, avoiding if possible situations where investors will choose to buy a vowel rather than give you the money. Sounds like common sense, but I see the opposite story more often than you might think.