Startups have Freshness Dating
One concept that many entrepreneurs don't really understand is that start-ups have freshness dating. You know, "Best if Exited by 2010." There is no explicit schedule for any one start-up, but once the entrepreneur takes money from investors, the clock starts ticking.
There are several factors that influence the end date and how fast the clock ticks:
- How much capital is required to get to cash flow break-even. The more capital required, the faster the clock ticks and the less time you have.
- The pace of development of the market. A fast moving market (one with high growth and/or increasing number of competitors) will have a fast-ticking start-up clock.
- The monthly burn rate. If you aren't burning much cash each month, investors will be more patient.
- Each investor's situation. Is their fund looking for a quick exit to help make their fund-raising easier on their next fund? Does the partner need to put a 'positive number on the board' to enhance their standing in the partnership? Is the firm looking to free up board slots among the partners to have more capacity for new deals? These are the 'behind the scenes' issues which drive decisions that often befuddle entrepreneurs and cause tension in investment syndicates.
- The age of the deal. As companies raise multiple rounds of financing, investors get less patient. There are some deals that manage to have multiple lives, with recap rounds of financing and the ability to continue to raise money. But, these are often very circumstantial. As an entrepreneur, you don't want to count on your ability sell the dream to an ever-changing syndicate. As an investor, I always evaluated a company on the amount of progress they had raised vs. the amount of capital raised. I would be drawn to deals where the entrepreneurs had gotten a lot done on a little capital.
I grew up with an exposure to the grocery business, but in my family and in my high-school job. I remember working in the produce department when we had too much lettuce. The manager was worried that it would start to rot in the back room. So, we had to do whatever we could to 'move the lettuce.' Don't let your start-up begin to rot -- keep it capital efficient, nimble, and moving forward. If you sense things stagnating, be proactive about making changes.