Financing for a year (and less): tips on managing start-ups in the context of "financial deadline"

Let's imagine that you are the founder of a company that has successfully received funds from business angels or, say, as a result of an institutional round of financing, and now your situation is this: you are given 12 months or less to disperse.

The most difficult thing at this stage is to take control of your own psychology. You must cope with your anxiety and not be too pessimistic about your prospects, but together you should avoid irrational optimism. This is a delicate balance.

First, you must clearly understand what means and how much time you have. Before proceeding with further reading of this article, I recommend reading the publications The Fatal Pinch and Default Alive or Default Dead (translation of the last article is available on Megamind - comment of the translator).
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If your business is dead by default, then your duty as founder is to take action immediately to fix it and revive it. The mechanisms that allow you to do this are simple and clear: you need to increase income, reduce waste, or both.

Counterproductive ideas

Founders may be prone to a way of thinking that causes inaction and inability to remedy the situation in which they find themselves.

Here are some common counterproductive ideas:

• Fatal investments do not apply to me.
• Investors will continue to invest in my company, even if I run out of money.
• If I can't get the investment, then I can just sell the company.
• Negotiations with potential buyers or investors will take place only in the distant future - if at all.
• My company will not buy if I reduce the costs.
• The morale and motivation of my employees will fall, it costs me only to reduce costs.
• New investors will not finance our project if I cut costs.
• Do not allow these ideas to be the reason for your choice to leave your business dead by default.

Recognize the leverage that you have in negotiations

What can we learn from the chart below?

• Delaying spending measures is a bad strategy. Make a change now so that your business can become alive by default.
• From the point of view of game theory, an investor or buyer will often be slow in making decisions until you have enough leverage at all. An enterprising buyer or investor is unlikely to say “no” directly to you, but he will not rush to the decision until you are in the end.
• If things are not going right now, as we would like, and you do not take any measures to correct it, then there is a very high probability that things will get worse, but certainly not better.

Some tips on reducing waste

If you want to reduce losses, the least painful solution for this is to make a lot more money right now. You are trying to do this anyway.

But what if a sharp increase in revenue in order to make a business alive by default is impossible? You have to cut costs.

Real estate rental contracts are binding agreements, and it is very difficult to get out of the costs associated with them. The obligations associated with the rental of real estate, are a common cause of death of companies at a later stage of development.

The costs associated with wages are also the most likely source of a company’s high rate of financial resources. The main reason for this is usually too many hired workers, as mentioned in The Fatal Pinch article. If you decide to cut staff, it is imperative that you part well with the staff. In addition, your policy should be clear and transparent for the remaining employees. Remember: you should always treat employees the way you would like them to treat themselves.

The easiest way to reduce wastage on such things as marketing, bonuses and unforeseen expenses for bonuses and parties. Do not throw away your money on all this.

Point of no return

What happens when you have less than three months left? It is very important to advance a rational approach to solving the problem, calculate your obligations and go to the scenario of closing the company.

In most cases, less than two months is a point of no return. If you are at this stage now, then you need to immediately dissolve your staff, pay your obligations, and use the remaining funds for expenses related to closing the company. If you do not do it now, you will end up without money, with wage arrears, taxes and other obligations - then things will really go very bad.

Some things to consider at this stage:

• When you come to the point of no return, you must close your company.
• Do not bankrupt. Pay your debts. You must pay your taxes and salaries for your employees.
• In particularly unpleasant scenarios, personal responsibility may be imposed on you. Consult with your attorneys on how to close your firm properly.
• Do not hesitate and bring to the situation when the situation is extremely negative: for yourself, for your employees, for your investors or for your clients.
• Even if things are not going as you would like, continue to do so that you can be proud of yourself.
• It is not easy to adhere to the role of the company's founder in this situation. Seek support and advice where they can be found. Mentors and advisers can help you lead a company through these difficult times. Often the most difficult thing for founders is “admitting your own defeat.” You are worried about your reputation, so do not stop reminding yourself that coping well with a situation is equally important when things are going both bad and good.

And finally, if you do not remember anything, then remember the following two things: 1) do not lie to yourself and 2) act quickly and decisively.