How to Survive the Series A Crunch--From Someone Who Didn't
CEO/Founder’s only jobs:1) Don’t run out of $$2) Recruit AND retain best talent3) Set & spread the vision It’s harder than you think.
— Jason Evanish (@Evanish) May 3, 2013
The above tweet really encapsulates what’s required to lead an early-stage startup. If you’re a fellow founder, you’re likely nodding your head a bit now. You already know how tough it can be to manage the delicate act of balancing all of the above. Even when you’re doing great, it seems one of those is always out of whack. And when times are tough every one of them can be screwed up.
If you’re in-between your seed round and your Series A round, this post is for you. Especially if you happen to be in the e-commerce space. Today, those companies face the biggest challenges hitting the break-even point or raising additional capital. This was my experience, and out of it I have a few recommendations. I tend to give a healthy mixture of both good and bad advice to other founders, this post has a little of both I’m sure.
Recently I had to step down from my own startup for a few reasons, the main one being #1 on that list above: Don’t run out of money. Once I stumbled on that point, I found it tough to regain my footing with the business. So while the “Series A Crunch” was not the entire reason for my failure, it was a major contributor. It set off a chain of events that left me holding nothing but thoughts of how I could have done things differently.
Now, don’t get me wrong—like most early-stage companies, the business had a few faults. Margin could have always been better. Operations can always be improved when you’re shipping actual product. Timing most certainly could have been better. In the end, though, it became very clear that the Series A crunch was in fact real, and I was living it in some form.
I’m not great at fund-raising. I think in general most founders are better builders than we are beggars. Unfortunately, though, as founders we need funding. Fund-raising is like the DMV—it’s painful and annoyingly complex to navigate, but a necessary system to keep the roads moving. It’s not perfect, but it works most of the time.
One critical mistake our business made was trying to rush our Series A in Q4 of 2012. We had hoped to wrap it up before snow hit the Tahoe mountainside (the official end of investing season), but it didn’t happen. Instead, we found ourselves in December with dwindling cash and a bleak outlook. My personal spirit and energy took a massive hit, from which I frankly never fully recovered, despite managing to put together part of a smaller Series A round this year.
In terms of market conditions we pulled off a trifecta of unsexiness. We were e-commerce, subscription commerce, and “family tech.” By this time investors weren’t very interested in any of those things. That was clear early into the fund-raising process, but we kept trying to push it through. It would have been much better to pause, regroup, and go back out at a later time. When it comes to fund-raising, it’s very tough to swim upstream when the current changes. And the current changes often.
Then of course there’s traction—that mythical unicorn every startup tries to grab by the horn so they can ride off into the rainbow sunset, shooting lasers and spitting fireballs. Of course, it makes sense that investors don’t want to put their money into something with no traction. However, for many investors it’s never going to be enough. For e-commerce companies it’s more like you have Fab.com traction or you don’t. And if you don’t, well fuck off.
The best advice I can give founders here is to ignore the cries for more traction, especially when it would hurt your business or deplete your cash to satisfy those demands. Buy yourself more time and make the investors wait. They hate waiting, and as a result you may miss a train or two, but if you can emerge with a more sustainable (or profitable) business, your fund-raising needs will quickly move from “we need cash to pay rent” to “we don’t really need your cash, but we’ll take it to grow even bigger.” That’s a great position to be in for many reasons. I can appreciate it’s not easy to get there, but traction on your balance sheet is almost always more valuable than traction with vanity metrics.
If you’re a founder stuck between the seed and Series A rounds, get your business sustainable, and fast. That’s all that matters. Stop listening to investors who want your business to grow unnaturally fast to get that next round. Stop traveling or spending money on PR. Stop buying snacks for the kitchen. Just focus on your business and do whatever it takes to become self-sufficient.
Cutting costs is one of the more difficult things an early-stage founder has to do; I can relate. However, if you have staff who aren’t performing or salaries that are too high, you need to sharpen your axe. The operational and employee-happiness costs should be easy to cut. I know we all want to create a great company culture, but if you need to extend your runway that’s a lot more important than catered lunches or other perks. A loyal team member is going to stand by you even when times are tough and the snack cabinet is bare. At my company we managed to have 100 percent retention until the very end. I was extremely proud of that and of my staff for pushing forward in a world of uncertainty.
I did, however, have to let go of some very good staff to reduce costs. That was hands-down one of the toughest things I’ve ever done. Take a deep breath and work though it. Good people find new jobs, and life always goes on.
On Being Accelerated
Like many companies these days, we were part of an accelerator. I actually think that in general accelerators are a good thing as they allow more companies to get off the ground. At the same time, it means A LOT more companies are getting pushed out there. So now we’re all competing for wallet share with investors, not to mention a lot of preconceived notions. In my experience there are also a few unsaid rules that investors are using as a framework when dealing with companies from accelerators:
- If you’re not a YC company you’re less interesting.
- If a firm has recently invested with one company from your accelerator they’re not likely to invest in another (too many eggs in one basket).
- If a firm has had a bad experience with another company from your accelerator it’s doubtful that they will invest in yours.
- LA-based accelerators have it much tougher, with less capital down here and Silicon Valley investors preferring local accelerators (YC, 500 Startups, etc.).
Then there’s that whole thing about being accelerated. Don’t get me wrong—I love to grow a business. Creating something from nothing is one of the most rewarding experiences a founder can have. However, fast growth has its own pitfalls. Growth without a soul is just that. It produces a shell of a company or product, and I can assure you quality investors have a great nose for that. There is such a thing as an overaccelerated company, and it’s not desirable with investors. Nonetheless, I would still recommend that most founders consider an accelerator. Just do your research and find the one that is right for you. Most of all you want one that is founder friendly (several are not), has juice (the ability to fuel or fund your business), and has demonstrated some measure of stability (most are a shit-show).
On Leadership During the Tough Times
Here’s where you’re really going to be tested as a founder and leader. Every early-stage company is going to experience ups and downs. The ups are sweet, and it’s easy to lead during those times. The downs hurt, and they hurt bad. How you react is going to say a lot about your character and ability to take a company all the way. I wasn’t ready for that, and you probably aren’t either. My personal experience and recommendation is to keep as much as you can on the table with the staff. While I shielded my staff from much of the minutiae of fund-raising, I did share when we faced challenges. Since those challenges would eventually require us to make cuts, it wouldn’t have been exactly easy to hide, so I preferred to be overly transparent—perhaps too much so in some cases. I feel that in the end, the staff appreciated it.
I know of many startups that run the ship like a big corporate monster, keeping the staff entirely in the dark. It’s very easy to poach employees from those companies, or worse. So you want to share and be open but at the same time avoid creating too much concern with employees. I tried to instill in my staff the understanding that high risk is a baseline for startup life. As a result they could embrace the uncertainty and take pride in overcoming it.
On How to Vent
Andreessen passed on us but they did invest in a message board for rap lyrics. Now I’ve got 99 problems and apparently a pitch is one.
— Series A Crunch (@SeriesACrunch) December 2, 2012
For founders, most of the time everything sucks. Increasingly these days it’s hard to find good avenues to vent and voice frustrations. The pressure is always on (or at least implied) to appear rock solid, regardless of how tough times get. That can be especially rough in the modern world of social media where anything you post/tweet/say can be misinterpreted by staff or investors.
To deal with this I recommend using a nom de plume or pseudonym when you feel the need to vent. There are no shortages of online platforms from which you can vent or rant and rave somewhat anonymously. Take the above tweet for example from @SeriesACrunch; I know this tweet and attached parody account helped the entrepreneur get through a tough time. (Mostly because I’m the one who wrote it.) So use these modern platforms as a therapeutic means to vent or create something. It helps, and I know I’m not the only one doing it.
On Falling out of Love with Your Startup
It happens. I don’t think most founders really talk about it, because it would be a scarlet letter for fund-raising. For me it wasn’t so much that I fell out of love with the startup. It was the stressful on-again, off-again nature of our fund-raising that took a huge toll. The ups and downs can become so extreme in some cases that the relationship quickly becomes unhealthy, both emotionally and physically. Just as in romantic relationships, with a startup you don’t want to give up. If you give up too easily you’re not in the right business. So you keep trying even when it continues to not work. But as with a bad relationship, it does eventually become futile to keep trying. Push to the end, knock on every door, and get counseling, but know that sometimes you just won’t fall back in love with your startup. If that’s the case it’s really your duty to get out of the way. Intense love and passion is what builds great companies, and without it you really don’t have a chance.
There’s no simple answer for all the founders out there stuck in the middle of making it or breaking it. I wish there was. Just know that you’re not alone. There are literally hundreds of other startups right now in the same position as you—some much worse. Do what you love, and do it the best you can. Know that if this doesn’t work out, all is not lost. You can build again. Keep fighting and good luck.
Sean Pervical is a serial entrepreneur, who most recently was CEO and founder of WittleBee. He let us share this post, which was original on his personal blog.