Tag Archives: Startup

Angel Investing – Burn Rate & Cash Runways

Businesswoman presenting her business ideas

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.

Break-even:

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?

The “dead-zone”:

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” 

 

Angel Investing – Twelve Days of Christmas 2017

12 days of christmas: 12 Snowflakes

On the first day of Christmas
St. Nick sent to me:
A Membership at The Wing! Continue reading

Angel Investing – Ringing in the New Year 2017

2017 Capodanno Natale 1It’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

Angel Investing -After the Check….

So you just wrote the check! Now what?

Image source: Fotalia.com

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.

Continue reading