The CEO was, as yet, unworried. He had, at his company?s current cash burn rates, about 24 months of cash left. And he was singularly focused on increasing sales which had been stagnating for the past several months. As part of this effort, he decided to hire experienced sales heads for his operations in the north, west and east while he decided to lead sales in the south. To generate sales, he also invested in getting a marketing head from a competitor. Soon, the sales pipeline started looking up. However, all this took about four months of time and added costs.
The CEO was now a little worried. He had about 18 months of cash left. Given the sales cycle time?the increased costs, order values and the cash collection?it would at least 24 months for the company to turn the cash flow positive. In other words, the company would need a fresh infusion of capital to survive at least six months to cash-flow breakeven and then to grow and expand.
Assuming it would take six months to raise fresh capital meant that the CEO would have to approach investors no later than 12 months from now. He would have to generate excitement in his company among investors by executing on sales, customer satisfaction, cash collections, brand building, along with a host of other activities in the next 12 months. Speed of execution and executing to a schedule?both would be critical for the company from now onwards.
Timing is everything. In a start-up situation, it is sometimes the only thing. A lot of things can go wrong and they usually will. A few things to keep in mind, in no particular order:
* Don?t raise money when you are down to your last paisa. Start the fund-raising process when you have at least six months’ money in the bank and when you don?t really need it
* Quickly figure out how much fresh money is needed and for what purposes
* What?s the fund-raising strategy?what kinds of investors, how many of them, any preferences/dislikes, the kind of pitch to make, how to approach them, a back-up set of investors and a back-up Plan B, etc. Do the research on the investors.
* Make sure that you are making steady progress on the business front while fund-raising. You must have positive news about the business every time you meet venture capitalists (VCs) during fund-raising. For instance, ?we signed two more customers?, ?we hired a top-class VP-sales? or ?big company A has decided to partner with us?.
* Don?t waste time, especially if you are a first-time entrepreneur, on excessive analyses and by negotiating to death. It is better to get going with your funding and on building your company than worrying about a few percentage points. The reason is simple. The longer discussions drag on, the greater the risk. Markets change, priorities change. The investment area may become crowded and VCs may lose interest in your venture. For example, other similar ventures could get funded by other VCs while you are still in discussions. This may reduce the attractiveness of funding your venture. Or, the VCs you are in discussions with may find other more interesting opportunities and, therefore, lose interest. Or, travel schedules and ill-health can upset plans.?The real value, all said, lies in creating a valuable company and that happens only through great execution. However, if discussions drag on and on with one set of investors, move quickly to plan B.
You should be the person controlling the pace of the negotiations and discussions and for that you need to have a very good understanding of timing. Timing of when you need the money, what you should have achieved and will achieve over the fund-raising cycle; and timing regarding when you want the money in the bank.
What do you think?
Sanjay Anandaram is a passionate advocate of entrepreneurship in India. He?s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD Business School in driving entrepreneurship. Email: sanjay@jumpstartup.net. These are his personal views