A VC in Vacationland

I was driving home through a pretty fancy suburb of Boston today when a beggar approached me at a traffic light holding a sign saying "Fallen on Hard Times". I gave her some money…I'm a sucker for beggars, especially grandmothers. Don't tell my wife–I'll be berated…again…for giving money to homeless people.

It got me thinking about a recent meeting I had with a startup I have been mentoring for over a year. The founder told me that he had run out of cash and was shutting down all development and marketing. I knew cash was tight, but not that draconian measures were needed. The rub is that the company is doing very well in the sales and customer satisfaction arenas.

But how did the company fall on hard times? Pretty simple–the founder made mistake number one for an entrepreneur–he ran the company out of money. No real excuse for that and numerous people could have helped if we knew a few months prior to the sad event. Now he wants to raise a seed round and his customer acquisition stats will be near zero for the next few months since he can't afford to pursue new customers. It's going to be very difficult….

I understand the basic reasons–he wanted to have a MVP–minimal viable product–to present to investors and spent all his previous capital getting that done, along with acquiring additional customers. Now, he does not have the capital to make improvements, fix bugs, or service existing clients.

The number one job for a founder is to make sure there is money in the bank, or that he/she have a good plan to bring it in as needed. You need at least 6 months and preferably 18 months of cash burn to ensure you can make your company viable. Fail that and it all fails.