Risks in Startups as an Asset Class: Part 9: Uncertainty of additional funds

Startups are uncertain businesses. This uncertainty includes surprises in terms of hiring, product development, marketing, infrastructure costs and other elements. While most costs are predictable, the ability of a startup to burn cash is never predictable. This covers the ability of founders to anticipate exigencies and costs associated with those exigencies.

On the other hand, there is uncertainty over the further availability of funds. Investor interest and startups performance including fund raising, is unpredictable. So how do we understand these risks?

It is important to understand the way fundraising happens with that particular startup. Most founders sound right about fundraising and cash burn. It is hard to see through this, and hence it is probably the most cloak-and-dagger risk of them all.

1. When we review the financials, it is easy to understand the runway for cash burn. The runway needs to be extended, or the plane needs to slow down. Look for the founder's response here.
2. A second level look will give us an indication of 'inflated' expenses, if there is. This indicates a plan to burn cash already in place.
3. Is the use of proceeds open ended or towards achieving milestones? This will give an indication of the plan, if not the predictability of fund use.
4. Is the founder talking about the next round already? If so, what is the gap between the two rounds, and what are the milestones in between?
5. Here is where a bit of funding knowledge ( read crunchbase or venture intelligence) helps. If competition gets funded, we will know the fundability of a track ( sector) among other details.

The above of some of the tips to understand the risk of unpredictable future fund availability while investing.

~Krystal Ventures Studio