Matt Cohen
More posts from Matt Cohen
With the economic downturn and associated uncertainty, startup founders at every stage have been rushing to shore up their balance sheets and extend runways.
I’ve been recommending that founders plan to have at least two years of runway in the bank (ideally three). However, if you were in the process of raising a round or just embarking on your next fundraising circuit, that can be a tall order.
Founders of such companies are faced with a tough decision: waiting it out and hoping the six to 18 months of runway they’ve got can last them through a potentially protracted downturn or securing extra runway via a down or flat funding round.
I lived and invested through the 2008 crisis, and I’ve been trying to share the lessons I learned through that struggle with my portfolio companies, some of which I want to share with you.
One of the biggest lessons I’ve learned is: Err on the side of caution and secure the financing you need to be considered “alive” as a company, even if that means taking a flat or down round.
I’m telling every founder I meet to talk to their existing investors first about where the company balance sheet stands, and what they need to be confident that their company will survive the next several quarters. This can be a tough pill to swallow, but it’s an important (albeit difficult) conversation to have.
As an investor, I’ve had to accept the write downs and dilution associated with down and flat rounds, but as everyone would agree, it’s far better than taking a complete write off. For founders, this is a challenging message to deliver to investors, but your ability to do it maturely, rationally and wisely will show investors that you’re committed, smart and grounded in reality.
Macroeconomic cycles happen and are completely out of everyones control. But the founders who can get in front of these tough conversations will be the ones to reach the next milestone, albeit on a less attractive path, and remain alive to see their mission through.
Startups who have raised a Series A are currently the most exposed to this dynamic, as they’ve watched their Series B opportunities essentially evaporate over the last few months. We are about to see the rise of the Series A+ or Series A2 round, or whatever other creative packaging founders come up with for intermediary bridge rounds.
Their valuations will predictably not be what they were at the Series A, so existing investors are poised to take a step back when founders take this path. However, the best investors will make the most out of these situations.
Instead of delaying this conversation, I highly encourage startups in this situation to approach their investors now and secure their Series A2 round to shore up their balance sheets. It’s better to go to the well once and get what you need to see this volatility through.
Running off those reserves with a slimmed down, scrappy team can not only keep the company alive but unlock higher margins, maintain revenue streams and position the company well for a Series B when conditions are more favorable. Remember, if you don’t ask investors for support now, someone else in their portfolio will, and it might lower your chances of getting funded when you actually need it.
So don’t be afraid to approach your current investors (and even new ones) with the prospect of a flat round. In fact, if you don’t have the ability to achieve “always alive” status over the next few months, you should be out there trying to secure a flat intermediary funding round.
Don’t be afraid to disappoint your investors! They are living in the same world as you and understand what you’re up against. They want to see you succeed, even if it means they’ll have to wait a bit longer than they anticipated. We are entering the age of Series A2, A+ and Axyz rounds, so lean into it, and do what it takes to see your company and vision through to the next cycle.
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