Have you ever found yourself in No Man’s Land? You know. It’s kind of like you’re driving along on the highway, and a sign comes along: “Next gas, 50 miles.”
Your tank is close to empty. And you’re wondering, “Can I make it another 50 miles?”
The temperature is close to 100 degrees outside. You turn off the air conditioner because you know the air conditioner is burning fuel. Then you open up the windows.
You start sweating because, well, it’s 100 degrees outside. And you need to get to the next gas station. Welcome to the world of running an early stage startup.
Except instead of gas, you’re wondering if you have enough money to get to your next round of funding.
Sometimes through no fault of your own you find yourself in No Man’s Land. You’re asking yourself the question, “Should I raise money now before I need the funding? Or should wait to raise my funding and potentially get a higher valuation?”
But it’s not so black and white is it? There are other possibilities. Maybe you truly are in No Man’s Land:
- It’s too early for you to raise money because you haven’t hit enough milestones. But…
- You will not have enough money to prove out your company if you wait to raise money.
What do you do if you truly are in No Man’s Land?
But, first a story about my time in No Man’s Land.
I used to meet every Friday afternoon with Tina. Tina was our very able Controller.
Tina would come into my office with a pile of checks for me to sign. The routine was she would hand me the check, tell me what the payment was for, I would ask any questions, and then I would sign or not sign the check.
Then we would review where we were at financially. We would talk about our revenue plan, spending plan, and how much money we had left.
On this particular Friday it was clear to Tina and me we were going to run out of money before we hit our next major milestone.
Tina, as she usually was, was way ahead of me. She said, “We need to either cut spending or get a loan.”
I looked at the numbers, and I started to sweat. We were in no man’s land.
Make no mistake about it, “No Man’s Land” sucks.
The good news was we weren’t going to run out of money for over 12 months. This gave us lots of time to maneuver.
There’s an old adage regarding raising money. And that adage is “Raise money when you don’t need it.”
Rule number one: Always be looking way ahead.
You have to give yourself at least six months to one year (I recommend at least one year) to be able to raise your funding. So back into that equation to figure out when your next funding round is likely to close.
What’s your financial situation going to be like in six months to one year? Are you going to have enough money?
Back to my story…
Fortunately, we were way ahead of the game because Tina was on top of things. Tina had worked at many other startups, so she knew the time to act was now.
Tina and I started going through our options.
Option A. Raise venture funding now. I could try and see if there was a group of investors we could give an “early look” at the company.
The company was doing well. We had momentum, and we had accomplished a lot. We just hadn’t hit the major milestones we thought we needed to hit to easily raise more money.
I’ve tried to raise money too early sometimes, and it’s come back to bite me.
Remember you only get one chance to make a first impression. So if you do go out to raise money too early, it can put you in a bind.
This is a good time to pre-shop your deal. In other words, testing the market with a small group of investors is a good way to go because you haven’t gone to all your potential investors too soon.
We did have another option…
Option B. Get a loan. We could go to the venture lenders such as Silicon Valley Bank and see if we could get a loan.
The good thing about getting a loan is the loan will extend your runway by whatever the amount of money the loan is. The bad news about a loan is the interest and principle payments will increase your break-even revenue point.
We had a third option…
Option C. Cut spending. To significantly cut spending (as with most startups) would mean cutting headcount. I really didn’t want to cut the team because we had an outstanding team. Plus we were pretty lean already.
There was another option:
Option D. Do an inside funding round. Typically VCs like an external investor to lead the next round of funding. There are a couple of reasons VCs like to do this:
- It reduces risk for the existing investors. You have another set of deep pockets around the table. That’s always good just in case there is a crisis.
- The new investor “prices the round.” In other words, the new investor determines the new valuation of the company.
Still an inside round was worth considering because we were doing well, and our investors were positive on the company.
There was, of course, one other option:
Option E. Wait to raise money. In other words, let’s hope we have enough money to get to our next milestone, and then raise funding.
I don’t know about you, but I am risk averse. Waiting reduces your options to just one thing. Yes, we would likely own more of the company if we hit our milestones and waited to raise money.
But what would happen if we ran out of money before we hit our milestones? What would happen if the investing climate changed?
I’ve never liked “bet the company” strategies. And waiting to raise more money sure felt like a bet the company strategy to me.
We decided to go with the two-pronged strategy of getting a loan and testing the waters with a small group of investors.
We were successful getting the loan. And even better yet, we were able to get the first year of the loan as an interest only loan.
No principle would be due for one year, so our payments would be low. Tina did a great job.
Remember that startup success is binary. You’re either going to win really big, or you’re not going to win really big.
Trying to time the market to milk every last percent of ownership can actually keep you from achieving startup success. And that last percent of ownership you’re holding out for really doesn’t matter.
Think about it. Let’s say you’re one of the fortunate few that has a $1B exit. Is it really going to matter if you own 10% or 8% of the company?
You always want disproportionate positive upsides versus the downside. That’s why pushing for the extra 2% ownership might be keeping you from the 8% you know you can achieve.
So be pragmatic when you are thinking about your financial future. Get all the money you can when you can get it. That’s the best way to avoid No Man’s Land.