One of my favorite First Round Capital Holiday Videos is the the 2014 release – “It’s All About Burn Rate” set to the tune of Meghan Trainor’s “All About That Bass”. I sometimes find myself humming that tune when I am reviewing an investment opportunity from an entrepreneur who does not fully appreciate the importance of understanding how burn rate and cash runway can impact the success/failure of their venture. When analyzing the financial structure of an investment opportunity, I try to evaluate both the amount of time the funding will last as well as the milestones/traction that the funding will enable the company to achieve. Will the proposed funding result in:
- Achieving cash flow “break-even” which allows the company to have some measure of control over their financial destiny?
- An inflection point of milestones/traction that will position the company to raise another round of funding at more attractive valuation levels?
- Landing in the “dead zone” – not enough traction to attract the next round of funding and without further funding in need of cutting expenses.
If the current raise enables the company to generate enough recurring revenue to operate on a break-even basis, then the company can continue as an operating entity without having to lay-off staff, reduce marketing outlays or frankly shut the doors and cease operation. The company needs to have a clear understanding of their variable versus fixed costs – what expenditures are mandatory to allow the company to survive versus those that can be reduced or even eliminated for a period of time. Growth may be slower than desired, but may at least provide the company the time to pivot their strategy or hold out for a more attractive funding environment.
Traction reached for next round:
For most of the companies in which I am investing, there will be multiple rounds of financing required before the company is in a position to exit. It is critical to understand what are the milestones/traction that the next investor will require and how does the company plan to achieve these milestones within the runway provided by the current raise? On the expense side, does the company have a strong grasp of the resources required to execute on the plan? Do the assumptions for revenue recognition take into account a realistic sales cycle for the product/service being offered?
Unfortunately, many companies end up in this position either because they do not raise sufficient capital or do not have the ability to actually execute on the plan that would position them to be attractive to the next investor. I find this oftentimes with companies that utilize convertible notes and end up within sight of the maturity date without enough demonstrated progress. As an investor, I am usually faced with the decision to extend my note, invest more in the company to provide some life support, or hope that there is at least some asset value to be distributed to note holders in the event of liquidation.
Remember as the music states – “It’s All About Burn Rate”
Posted in Angel Groups, Angel Investing, Convertible Notes, Due Diligence, Early Stage Investing, Financial Models, Golden Seeds, New York Angels, Opinion, Term Sheets, Uncategorized, Venture Capital, Women Investors
Tagged Education, Funding, Investing, Investments, Launch, Money, New York, NYC, Perceptions, Portfolio, Portfolios, Risk, Start Up, Startup, Strategy, Term Sheets, Value, Viewpoint, Women
On the first day of Christmas
St. Nick sent to me:
A Membership at The Wing! Continue reading
Posted in Angel Groups, Angel Investing, CrowdFunding, Due Diligence, Early Stage Investing, Feminist, Golden Seeds, Kickstarter, New York Angels, Opinion, Uncategorized, Venture Capital, Wharton Alumni Angel Network, Women Investors
Tagged Funding, Happy Holidays, Investing, Investments, Money, New York, Startup, Startups, Stereotypes, TechCrunch, The Wing, Women
It’s that time once again to reflect on the prior year and make some resolutions for the next. In last year’s post, I suggested that you:
- Take a critical look back at portfolio companies that didn’t make it and try to ascertain what really went wrong.
- Expand your access to quality deal flow
- Become a mentor to a young entrepreneur
Here are a few of my suggested resolutions for 2017: Continue reading
Posted in Accelerators, Angel Groups, Angel Investing, Due Diligence, Early Stage Investing, Feminist, Golden Seeds, New York Angels, Opinion, Uncategorized, Venture Capital
Tagged Funding, Investing, New York, Portfolio, Startup, Strategy, Viewpoint, Women
There are a variety of funding options for entrepreneurs to consider as they explore taking in external capital. For investors, understanding the pros and cons of these various funding options and how they fit into a company’s overall funding plan is critical. One option, a Convertible Note, is a hybrid structure that is used as a bridge to a future equity round. In addition to a stated interest rate and maturity date, Convertible Notes will have conversion terms that outline how the notes will be repaid or converted into equity. The amount of equity that a company needs to raise to trigger the conversion of the notes is referred to as the qualified equity financing. Historically, I have seen this form of funding used primarily in pre-seed rounds where the company needs to raise a small amount of capital to get to proof of concept as well as a bridge financing between a Series A and B round in order to provide the company with a bit more runway to get to the metrics required by a Series B investor. Continue reading
Posted in Angel Groups, Angel Investing, Convertible Notes, Golden Seeds, New York Angels, Uncategorized, Venture Capital
Tagged Convertible Notes, Golden Seeds, Investing, Investments, New York Angels, NYC
On the first day of Christmas
a founder shared with me:
A Term Sheet for Series B Continue reading
Posted in Angel Groups, Angel Investing, Early Stage Investing, Golden Seeds, New York Angels, Opinion, Uncategorized, Venture Capital
Tagged Angel Capital Association, Angel Investing, Angel Investor, Golden Seeds, New York Angels, Women Angels, Women in Angel Investing, Women Investor
As an angel investor, I see lots of financial models, which range from the very simple to the extremely complex. I am often asked why I insist on seeing the actual model ( yes the excel not the pdf version) as it all based on layers of assumptions. In response, the financial model is nothing more than a quantitative expression of the business model and in fact what is most important to me are the assumptions that underlie the numbers. Continue reading
Posted in Angel Groups, Angel Investing, Financial Models, Golden Seeds, Opinion, Uncategorized, Venture Capital
Tagged Angel Investing, Angel Investor, cash flow, Early Stage Company Valuation, Financial Modeling, Funding, Golden Seeds, revenue models, Startups, Women Angels, Women Investor
Earlier this week, I was listening to an NPR program on “energy vampires”, those special individuals whose interactions can literally drain the energy from us. The term “energy vampires” was coined by Dr. Judith Orloff, a clinical professor of psychiatry at UCLA in her book Positive Energy. Now everyone has had some experience with “energy vampires” – those special people who cause some of the following reactions:
- You hope a call to them goes directly to voicemail
- You need a trip to Starbucks before and after meeting with them
- You would rather have a root canal (the extreme version)
You get the point…… Continue reading
Posted in Angel Groups, Angel Investing, Golden Seeds, Opinion, Uncategorized, Venture Capital
Tagged ACA, Angel Investing, Angel Investor, Dr. Judith Orloff, Energy Vampires, Follow-on Rounds, Golden Seeds, Portfolio Company, positive energy, Women Angels