VC Cliche of the Week
I spent some time this week working on financing strategies for some of our portfolio companies. It’s very important to have a financing strategy.
You can’t simply put together a powerpoint deck, set up a bunch of meetings, and expect someone to step up and do the deal. What if things go badly? What do you do then?
So I believe you need to design a financing strategy that aims high but has a well crafted downside scenario.
The cliche about this that I like is “hope for the best and prepare for the worst”.
It’s a bit like applying to colleges. You might want to apply for early admission at your top choice, you might have a short list of three to four places you’d love to go, but you also need a “safe school” that you can live with.
I knew a kid in high school who applied to one college. He didn’t get in. That really sucked.
So how do you go about hoping for the best and preparing for the worst?
I think its best to start with the downside scenario. What happens if your company can’t get anyone to step up and do the financing on terms that are acceptable?
Well there are a couple approaches to this. The first is to do the financing when you don’t really need the money. That’s a great strategy. Maybe you’ve got nine months of cash left in the bank. Maybe you go out and talk to three or four potential investors to see if you can get something done with them on terms you’d like. If you can’t, you stop the process, go back to work, and come back to market in another six months.
If you don’t have that luxury, then you need to turn to your existing investors as your downside scenario.
There are a couple of ways to think about this.
The first is to get the existing investors to tell you on what terms they’d be willing to do an insider round. Get that locked down and then go out and see if you can do better. If you can’t, then you come back with your tail between your legs, but comforted in the knowledge that your company isn’t going to hit the wall.
The second way to deal with this is to put a bridge in place. Get the existing investors to loan the company enough cash to fund the company for say six months and agree to convert the bridge into the next round.
You can even marry these two approaches by getting the investors to bridge a portion of a potential insider round while you go out and try to find a new investor to provide the balance of the round and set the terms.
The only thing I would caution against is using the bridge if you don’t have to. Many new investors will see an outstanding bridge loan as a sign of weakness and approach the deal accordingly.
If you need the cash, take the bridge. If you don’t, then I’d avoid it.
Having a downside scenario is really critical to a successful financing strategy because it gives you confidence. Then you are inviting new investors in, not begging for money. That’s a big difference as anyone who has gone begging for money can attest to.
So prepare for the worst. If you do, your hopes for the best have a better chance of coming true.