The Camel Series: The OR versus the ER

This post was written by my good friend?Scott Hartley , the co-founder and managing partner of The Fund and the author of The Fuzzy and the Techie. Originally published?here .

As we enter 2023 there has been a guiding theme in many conversations that we’re having which is, “how do I do more on less?” This requires a mental shift from what I might call “abundance mentality” to “resource-constrained mentality.” For anyone who might recall?the story of Apollo 13 and the less-than-optimal pile of duck tape and cardboard from which Commander Jim Lovell and crew had to make an air filter to convert CO2 out of scrap materials to stay alive , this is 2023 for many startups.

I too have been there, many times in the trenches. I’ve gotten the elated email saying “we’re in for $3M” and also the midnight note when cash is out and we might have to let everyone go by 5pm tomorrow or run the risk of being in fiduciary breach, conference calls with law firms costing you money you don’t have, and trying to bridge a company to acquisition out of the executive team’s pocket. As anyone knows in startup land, there are extreme highs, and also extreme lows of self-doubt.

There is a dream of unlimited capital where your desired hires, desired salary, and desired months of runway to perfectly de-risk the business reverse engineer the target fundraise, and you back out valuation by dividing your target fundraise by 15-20% dilution. This is abundant living, and these days are on hold for now. Of course we’ll all read about some serial founder’s new company that we didn’t know existed that just closed a $40M Series A pre-product, but that’s not me, and that’s not most of us. For most of us we need to shift gears into “resource constrained” mentality.

Logic of Abundance:

• I need to prove out X, Y, and Z to de-risk my business
• In order to do that I need to hire people, and build for 18 months
• The cost of those people is $100k/month so I’m raising $1.8M
• I’ll probably just oversubscribe to $2M and do it at $10M post
• That’s a nice round number of 20% dilution I can sleep with

Resource constrained logic is our new paradigm. This is the reality in which you don’t get the perfect oxygen filter and burn time to take the spaceship home. Instead you have a pile of cardboard and duck tape and 14 seconds of fuel to burn to put the spacecraft on the exact trajectory, or you’re going to bounce off Earth’s atmosphere and hurtle endlessly into space. This is the world of Apollo 13 and imperfect solutions, and you need to figure out how to make it all work without all the right parts. Nearly always, something pretty major is missing, both in pre-seed investing, and in pre-seed company building. It’s about making it work in spite of missing pieces. This new world is one in which investors remain on the fence waiting for a lead, where some Zoom calls result in “come back to me when you have more traction,” or “we actually?only?invest in [insert one of 1,000 made-up excuses].”

Resource-Constrained Logic:

• I need to prove out X, Y, and Z to de-risk my business
• In order to do that I need to raise as much money as I can
• Let me A/B test various fundraising strategies holding constant the amount of acceptable dilution, but varying amounts of capital. For example if I can only circle up $750K of interest, and investors are willing to price this at about 15% ownership, then the post-money cap on my round will be $5M.
• I need that $750K to last me 18 months
• Therefore my burn rate can be 750K/18=$41,666
• I need to figure out how to run my business on $41K net burn rate / month. If this is utterly impossible then I need to go back to the drawing board and accept more money and more dilution. Or I need to generate services revenue such that perhaps my gross burn can be as much as $60K or $80K but I’m offsetting that net burn with $20-40K of revenue per month. These are my options.

We have phrases such as “down round” or “re-price” that scare us, but they need not alarm. When these words come about we’re likely long past preventative medicine or even the Operating Room where we get to control every aspect of the surgery and make sure every stitch is perfect and every wound dressed. We are now in the Emergency Room where the operating principles are different.

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