6 Months of Cash

I don’t like generalizing advice to startups but I’m about to do so here:

If you have around 6 months left in cash, then your #1 priority is to raise more money or get to break-even.

Some corollaries and related thoughts:

  • If you have less than 6 months of runway, the first step is to ask your existing investors if they can “bridge” you. “Bridge” financing is money that helps you get to (i.e., bridge to) a milestone event like future funding, inflection point, etc.
  • Get a “Yes/No” answer quickly and get the cash in the bank.
  • We at SV Angel rarely if ever lead or participate in these types of bridge financings. That’s not our business model.
  • The problem with party rounds (i.e., many investors) is that your current investors may not have the incentive nor the capital to “bridge” you.
  • Plus, it takes more time with more investors. Like herding cats.
  • Having 6 months gives you some cushion (i.e., leverage) when negotiating with new investors.
  • If you have a “lead” investor who invested the bulk of the earlier round and this investment is material to their portfolio, he/she/it may be incented to “protect” or “defend” their earlier investment.
  • This is part of the “value add” that these people/firms provide.
  • Unfortunately the only way to extend your runway may be to lay people off.
  • This may not apply if you have strong growth along some critical dimension like active, engaged users or repeat visitors.
  • In this case, many new investors would be interested and your current investors would fund you.

I learned this in the fall of 2008. The financial world was literally on the brink of collapse. All investors – including VCs – got alligator arms, with good reason. Some startups asked us if their cash was even safe in the bank. And the crazy thing is that we couldn’t even give them a straight answer. If things collapsed, there wasn’t an obvious answer. The whole world could look like Greece or Ireland.

As a result, we sent this email to all of our portfolio companies. Our message was that the world had changed. Companies should get used to the ‘new normal.’ In fact, as things got more dire, we extended “6 months” to “12 months” and then to “18 months.”

To some, things feel like they’ve changed since 2008. The tech ecosystem came back with a vengeance with companies like Facebook, Zynga, Groupon, Dropbox, AirBnB and Twitter leading the way. People argued about whether we were in a bubble. Happy times were here again. And then the recent short-term performance of some of these companies suffered, and people swung the other way, wondering if this proverbial bubble had popped. Some argue that the global economy never addressed the root cause in 2008 – too much spending by everyone on borrowed money. And that at some point, “kicking the can” won’t be a viable solution.

While we didn’t have to dispense the “6 month rule” advice as much during this time, we still believed that it applied. You only have to read the front page of any newspaper in the last few years to see that there’s still a lot of financial and economic uncertainty. Also, we didn’t have to dispense the advice as much because more companies were being started rather than seeking follow-on funding. We still think it is a good rule of thumb. It may be overly conservative, but I’d rather be paranoid than dead.