By David Cremin
The wrong answer: “we’re raising money for 18 months of runway.” The other wrong answer: “we’ll hire sales and marketing and engineering…”
Let’s play Jeopardy, what is the question?
The question is: “how much money are you raising and why?” But your answers above aren’t quite what we’re looking for when we ask that question; however, they are the answers I most often receive.
Building companies is not about months. It’s about achievements. Milestones. Completion of major goals. Everyone around the table must understand and believe in some set of goals that, if achieved, will likely raise the perceived value of your company. A next phase. A moment of optionality. That is your company’s inflection point. You’re raising capital to achieve this inflection point!; btw, you should also be raising enough capital to have cash in the bank at that moment, so you have time to think about your options and execute on them. If everyone agrees on the goals, then imagining and executing on the tactics to get there is transparent, and trackable, which keeps everyone on the same page from the top to the bottom of your company. Only then, when your goals and tactics are clear, should you work backwards on the time you need to achieve these important goals, and tactics required to achieve them. It may be 18 months, it may be 6 months. Tailor your capitalization strategy accordingly.
Therefore, when asked the question, how much and why, here’s the sort of answer I wish we received:
- Here are the 2 or 3 goals we are going to achieve; if we achieve them we will have proven that our business is valuable because…
- We will then have options to raise more capital, or sell the company, (or also be cash flow positive, unlikely in most companies, but provides the most complete optionality)
- Our cash flow forecasts suggest we can achieve these goals, and we will have 6 months of cash in the bank at the time they are achieved, so we’ll be in great shape to make important strategic decisions
When I hear this kind of response from an entrepreneur, I know she is thinking about value creation, and how venture capital relates to it. She is thinking about the inflection point.