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
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
Last week I had the opportunity to attend the Golden Seeds Innovation Summit. During this annual event, CEOs from the Golden Seeds Portfolio Companies, Golden Seeds Members, LPs in the Golden Seeds Funds and guest speakers come together for two days in NYC. It is a venue for the CEOs to update current and potential investors about their companies and also to interface with one another, a powerful networking opportunity. In addition to hearing about the progress of our portfolio companies, members are able to attend sessions on topics including; positioning for exit, brand building, trends in various industry sectors, and many others.
To me, angel investing is so much more than just writing a check, as I discussed in an earlier blog post. The ability to interface with our dynamic CEOs and to collaborate on investment opportunities with a great group of investors, like my colleagues at Golden Seeds, is “What it’s all about“. Each time I participate on a deal team, in addition to sharing my own expertise, I always learn something new. I follow my companies on Twitter and other social media venues and try to be a supportive “angel” (which means not trying to micromanage but being strategic with both advice and input). I feel extremely privileged to be a part of the Golden Seeds national network and look forward to investing with them in 2013.
Posted in Angel Groups, Angel Investing, Golden Seeds, Opinion, Uncategorized, Venture Capital
Tagged Angel Investing, Angel Investor, Early Stage Company Valuation, Equity, Exit Strategy, Female Angels, Female Investors, Golden Seeds, NYC, Portfolio Company, Women Angels, Writing Checks
So you just wrote the check! Now what?
There is a perception out there that angel investors and venture capitalists are only focused on monetary gain and don’t work to support the success of their companies post-investment. Angels are making investments with the hope of a successful exit and unfortunately the statistics on the failure of startups are quite sobering. According to Shikhar Ghosh, a senior lecturer at Harvard Business School, the failure rate of startups is 30-40%. ( Source: HBS Working Knowledge Article by Carmen Nobel). But in addition to the potential investment returns, angel investing provides a unique platform for engaging with the companies in your portfolio, which is not the case when investing in the public markets.
Posted in Angel Investing, Golden Seeds, Opinion, Uncategorized, Venture Capital
Tagged 500 Startups, Angel Investor, Angel Investor Training, Check, Checks, Corporate Justice Blog, Dave McClure, Digital, Digital Rolodex, Education, Equity, Exit, Exit Strategy, Exiting, Exits, Faculty, Failure, Female Angels, Female Investors, Ghosh, Golden Seeds, Golden Seeds Angel Investor Training, Gotham Gal, Greed, Harvard Business School, Harvard Faculty, HBS, Investing, Investment, Investments, Investor, Mentorship, Money, New York, New York City, NYC, Perception, Perceptions, Portfolio, Portfolio Company, Portfolios, Rolodex, Rolodexes, Shikar, Shikar Ghosh, Start Up, Start Up Failure, Start Ups, Startup, Startup Failure, Startups, Stereotype, Stereotypes, Strategies, Strategy, Valuation, Viewpoint, Viewpoints, Woman, Women, Women Angels, Women in Angel Investing, Women Investor, Write, Writing, Writing Checks