Your Startup Is Unable to Raise A New Round -- What To Do?

Startups follow power laws: 1 in 10 really succeed, the rest do okay or fail. Obviously the more well funded a startup is the less likely it is to die but there is no such thing as too big to fail. If you are at the precipice of this power law, teetering between survival and existential threat and you have been trying to raise a new round unsuccessfully, this is a reminder you still have some lifelines. Here are some tradeoffs and practical suggestions; these options are not mutually exclusive and in fact you will likely do multiple of them:

1) Bridge From Existing Investors -- Often the easiest solution. Existing investors have their own ownership in mind so barring some other concerns, will at least prop the previous valuation. Chances are you can structure a slight upround to continue signaling strength in the company, or at the very least a flat round rather than a down round. And if you want to skip these questions altogether, just do a convertible into the next round. Your insider round will most definitely be seen negatively by the market because it signals there wasn’t enough outside interest. But I would argue owning it up and showing enough results moving forward will minimize or perhaps even neutralize that negative perception.

2) Loan From Another Party -- Often the second easiest solution. Banks will rarely extend a favorable loan if you are distressed but there are actually certain investors, both angels and VCs, that specialize in this situation. If you don’t know them in your ecosystem ask your existing investors to find out about them.

3) Reduce Burn Rate -- As painful as it is you must consider letting go of non-essential personnel. More creative solutions include voluntary resignations, deferred compensation, exchanging cash for equity, or transitioning some employees from full-time to part-time or consultants.

4) Get Short-Term Revenues -- This can work if you can do a NRE (non-recurring engineering) or something similar like consulting or design for another company. It will likely take you away from your core business or at the very least prevent you from long-term growth but a short-term boost timed well can actually get you over the hump. And if you maneuver this minefield well enough to then raise a round, you will certainly get the respect from any investor about your execution.

5) Make A Key Hire -- Really hard to justify spending resources when you are running out of cash. But if a key person will truly move the needle and you can afford the time then make a bold hire. The most common instantiation of this principle is for a founder to pass on the CEO role to a more experienced operator. To do this right the founder being on board and often leading the plan is almost a given. There are exceptions obviously and the high profile ones (successes and failures) end up making the news.

6) Sell Some Assets -- Often the hardest solution. You are essentially jettisoning part of your company which can be a death sentence for most early stage startups. But if your company is faced with the choice of having a shot or imminent death then an asset sale may be the only answer. The key is to think about it early and make sure you have a buyer ready, otherwise you will end up with a fire sale that will aggregate little.

What are some other ways you have considered when your startup is in distress? Comment away.

These are purposely short articles focused on practical insights (I call it gl;dr -- good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech, and all opinions expressed here are my own.