You recently closed a round. Now make sure you don’t have to raise again in 12 months

Here is a scenario that may sound familiar to many founders and startup employees. You close a round (congratulations! ????????????).? Everyone gets to fill all the overdue hiring needs, close tech stack gaps, launch new products, and enter the markets you always wanted but were short on resources. All the dreams rapidly come true. And when they do, you will be surprised but…it has not been 12-18 months and you are fundraising again. How did this happen? How could you prevent it from happening??

I’ve seen plenty of “oops we need more funding” scenarios play out throughout my career as a banker, as well as a startup Finance executive. Not all are a result of mismanagement. For example, an opportunity to acquire a transformational technology and/or bring onboard a stellar tech team may present itself shortly after fundraising. There goes the cash balance you expected to last 2+ years. If the acquisition is highly strategic and followed by a well executed integration it can take the company to the next level, so you will not have any issues attracting VC interest and with it more funding. This “event-driven” scenario is not a typical reason why startups run out of cash though. A lot of startups miscalculate the burn and run out of cash before they are able to execute on their strategic goals.?

How big is the problem??

“Running out of cash” accounts for 38%, while “no financing or investor interest” accounts for 27% of premature startup deaths. These are two leading causes of startup deaths in general. It is hard to overestimate the importance of maximizing the runway post a funding round.?

What typically happens?

Closing funding–>Overhiring–>Overfiring–>Looking for funding–>Closing funding–> Overhiring… This cycle keeps happening for too many businesses.

When you decide to raise money, you probably have a lot of headcount plans, purchases and new projects waiting in line for financing. So you finally close and everyone gets their wish. Ironically, this generous wish granting made possible by fresh funding becomes the exact cause for why you likely run out of money in 12-18 months. The main problem is that costs are incurred very quickly, while new revenue will take time to materialize - sometimes too much time for the cash balance to cover the timing gap.??

What should happen?

You might be tempted, but don’t start a wish granting festival. Instead:

???Update product & technology roadmap

??Update GTM plans

??????Update CONSOLIDATED headcount plan taking into account your new product & technology roadmap and GTM plan, as well as all investments in other areas, such as finance, data, operations, etc.

??Run ROI calculations and prioritization for each new initiative?

??Build multiple revenue and cash flow scenarios to estimate how long the funding will last. Don’t forget that execution more often than not takes longer than the original plan. Regulatory hurdles? Extra time to make v2 and v3 of the product before it is market ready? Demand in the new market does not materialize? Assume all these things happen as one of the scenarios, not the base case, but be prepared to address it too.

???Adjust your strategy based on the analysis above.?

When you go by the book, you’ll know that not every wish of every team could or should be granted. You’ll be able to prioritize the most strategic and the highest ROI projects pacing expenditures in a way that doesn't result in an unexpected cash crunch.?

Does anyone do it right?

I happened to know someone who did it right - Umaimah Mendhro , the CEO of VIDA at the time. I was her first Finance hire post Round A. Admittedly, she could give any CFO a run for their money if she was not busy being a CEO. What did she do to ensure that our investors’ dollars weren’t mismanaged??

??She did not set wrong expectations, so nobody held their breath that all our wishes would come true when the money hits our bank account.

??She asked for a financial model, a lot of financial analysis, burn rate estimates, runway, unit cost analytics and a detailed Opex plan, among other things.?

?She asked questions about every new hire, additions to tech stack and any new meaningful expenses.

??She was strategic in “wish granting”. I got my budget for an accountant and a bookkeeper. The GTM and R&D organizations got a few much needed hires added to their team, and upgraded their tech stack. We hired a couple of brilliant guys for the newly created data team. Some headcount requested pre-funding was not relevant anymore because of shifts in strategy and plans. These requests were denied and for a very good reason – we used the infusion of funds to recalibrate and realign the entire company behind our updated strategic priorities.?

There were a lot of external major events that we did not and could not plan for. If it was not for the fiscal discipline she instilled, VIDA would not have survived and quadrupled its revenue during Covid, while many other eCommerce companies in the apparel and accessories segment were going out of business. VIDA has since pivoted. Umaimah pivoted too - following her dream of creating an affordable, inclusive and high quality Masters degree program. However, her leadership will always remain a shining example of a CEO who mastered data-informed decisions and intelligent cash management.

Is it inevitable to constantly have to fundraise??

No, and thankfully this is not even rocket science. You need to do get two things right:

??Don’t make the financing round sound like a ticket to the promised land in your internal communications. Change the message to some version of “we will review the consolidated “wishlist” and execute on the must-haves most aligned with our strategy”.

??Remember that you are not Federal Reserve or Oprah Winfrey and can’t print money. Don’t spend a dime before you have all your scenarios analyzed, watch your burn and runway, update your forecasts often, prioritize investments, and take corrective action before distress and layoffs become imminent.