October 17, 2008
Just came out of my third board meeting since the financial market apocalypse. (I summarized the different discussions at two other portfolio companies a few days ago).
The CEO of this company had what we all agreed was a great grip on the situation.
Without fanfare, he started the meeting off with a board-only executive session, and put up a slide with three different scenarios: (1) growth (the plan we had heretofore adopted); (2) hold steady where we are; (3) trim. Next to each scenario, he identified when we would run out of cash, and how much additional cash would be required to get the company out 18 months from now. He also gave us a sense of what the company would and would not be able to accomplish under each scenario. (We also briefly discussed cutting to “hibernation” mode but quickly dismissed this option as pointless).
After a brief discussion, it became pretty apparent that the “right” course was somewhere in between (2) and (3), AND that there were a couple data points necessary to making the determination that we wouldn’t have for another 3 or 4 weeks. So we decided to gather the data points and revisit then.
We then had a very candid and blunt conversation of financing options. Again, we reached consensus pretty quickly: the market for outside financing would be nonexistent right now, and might or might not exist in 6-9 months with strong execution. Insiders did have appetite to continue to fund the company, though right now the terms would be pretty unfavorable given the fact that neither adoption risk nor business model risk had been removed from the deal. And we were able to have a very pointed conversation around the success metrics that would, in the insiders’ eyes, materially impact the risk/reward ration, and therefore investment terms, in our eyes. This all pointed in the same direction: keep a very close eye on cash burn to optimize the right balance between extending runway and moving the company forward from a value creation perspective; and not waste time fundraising right now but rather paddle like hell to improve the company’s investability.
I drew a couple lessons from what was considered by all involved a very productive meeting.
First, don’t rush to brash and/or dramatic decisions just because every VC under the sun is proclaiming nuclear winter. The answer is not blind cuts to extend runway, but rather smart cuts to maximize value creation. Cutting to the bone to allow the company to fritter away value doesn’t accomplish a whole lot, especially when there may be an alternative path which creates less runway but allows for the creation of real momentum and value along the way.
Second, the sooner entrepreneurs can have very direct conversations with their insiders around the prospects for inside financing, and to understand each others’ perspectives, the better. How this understanding unfolds may very well influence the budgeting exercise itself.