What Are The Early Warning Signs Your Startup Is In Trouble?

“There is no negotiation on this term sheet,” “Raul”, the Venture Capitalist, said to me. I was stunned.

There’s always negotiation, isn’t there? Everyone negotiates, right? Not this VC.

The terms we were given were horrible. I tried everything I could to get better terms, but Raul was unmoved. The answer was always “No”.

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Mike Tyson once famously said, “Everybody has a plan until they get punched in the mouth.” Raul’s refusal to negotiate was a punch in the mouth.

We had been raising money for two years. 63 VC firms had turned us down.

I wasn’t sure there would be another chance for us to get funded. So I accepted the term sheet after talking with my advisors.

We were in trouble and we hadn’t even started the company yet.

Raul’s behavior remained disruptive throughout the life of the company. Eventually his behavior forced us to sell the company well before we wanted to.

The signs of trouble are there if you look hard enough.

Look at your cash flow.

Cash is a lagging indicator of trouble.

So look at your cash, but you also want to look at other metrics and indicators that are more important than cash. For example, let’s say you have a product in the marketplace.

There are things you should be tracking about that product even before you get one paying customer that are going to tell you whether you are on track.

For my business, we used to look at three things:

  1. How much web traffic were we getting?
  2. How many free samples were we giving away of our products?
  3. How many customers did we have?

We knew, which is pretty obvious, that web traffic would lead to free samples, and free samples would lead to paying customers.

It becomes simple math once you know the ratios between your key metrics.

That’s what we did to track our growth. You need to figure out what those indicators are for you.

But let’s take even one step before that. What are the other things that tell you that you’re not on track?

Your employees tell you you’re not on track.

Many times people don’t tell you the truth when they are working for you because they are afraid telling you the truth will cost them their jobs. But employees do tell you the truth when they are leaving.

There’s a problem in your company if you have an inordinate amount of turnover. But you can take it back even one step further from there.

You have three possible problems if you’re having trouble hiring people:

  1. There is something wrong with your product, your vision, or your culture, or…
  2. You’re compensation structure is out of whack.

All these things could be possible, but they are all indicators that there is something wrong.

You can’t just turn the other way. You, the CEO, need to figure out what’s wrong and fix it. That leads us to the second part of this post:

What can you do to prevent these problems from happening?

Let’s start with cash.

A. Forecast, forecast, forecast.

B. The more you forecast, the better you get at it.

C. You will know more accurately when you are going to run out of cash.

You really want to forecast every month because that’s going to tell you when you will run out of cash. And remember that it takes at least six months, and more like one year, to raise money. So…

D. So the idea is getting way ahead of the curve on your financial management.

Again, don’t wait.

If you identify a problem, then you may have to:

  • You may have to slow down your spending, or…
  • Get a loan (if it’s possible) to extend your runway

Whatever it is, make sure you have the runway you need to get the company more funding or to cash flow break even.

Finally, you can start raising money early. Again, it is going to take you at least six months to one year to raise your funding.

You want to be way ahead of the curve on when you need money. So start raising your money at least 12 months in advance of when you are going to run out of money. Then you have a buffer just in case things don’t go the way you want.

Take one more action now while you have the time. Make your cash last longer then you think you need it to.

So make your cash last for 18 months if you have 12 months of cash left. I know it’s painful to take these actions. However the tough action you take today may be the difference between your company succeeding or becoming just another failed startup.

For more, read: http://www.brettjfox.com/whats-different-between-successful-failed-startups/

Written by

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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