By David Frankel, Managing Partner
“We learned a lot.”
When said to investors, this phrase is almost always a euphemism for “We’ve spent nearly all of our capital, don’t have traditional traction, but need more money.” Those four words will chill a VC’s soul — here’s what you should say if you’re running out of cash/time.
Sure, you might have flailed around in the process of finding a route to market, but now you’ve identified a specific person willing to pay. Not a category, not a company, but the individual that will write you a check.
You’ve lost the luxury of experimenting, growing slowly, you need to present a clear vision for the product that will turn your company around. You need to talk in terms of nouns and verbs, not adverbs or adjectives.
Cut whatever is not actively keeping your company alive. You’re not making investments for a year from now, you’re fighting to make it to the next quarter. Anyone or anything that’s not helping you close that key deal needs to go. Immediately.
You should be able to hit your next milestone with a relatively small follow-on from your existing investor base. The sunk-cost fallacy is actually your friend here.
This is not the time to get ambitious with valuation. While it would be nice to get credit for the legitimate learnings you’ve gained, now is not the time to push. Remove friction from your investor’s mind.
The earlier you realize you’re in trouble, the better your chances of convincing investors to fund a turnaround. No one wants to fund a startup in its death throes.
Arm your investor with a set of inspiring talking points that lend credibility to your plan. You want to inspire confidence, with your VC and their partners.
I promise you won’t be the first founder to go back to their investors with hat in hand. However, how you handle the process will determine whether you’ll be written off or reinvested in. Understanding the dynamics at play now is half the battle.