How to Keep Your Company Afloat When Investors Pull Out Just Before Closing
It was raining harder than usual as I grabbed a tea at one of my favorite cafes in Toronto. With the pounding rain making the monochromatic design of the cafe even more imposing, I started to reflect on the past month of my career. Just about to close my company’s Series A round, I was getting all investor signatures returned and starting to see the money hit the bank. By the end of the day, I could formally close the round and move on to doing what I really wanted to do: build my business.
There was only one issue. Our co-lead investor had not returned any signatures, emails, calls or even text messages. With one week of runway left, my entire team was starting to get nervous.
Finally, after many calls and texts, the investor responded and said he could not produce the money he had committed to and signed the term sheet for. This wasn’t at all a “reflection on our business and its potential,” he said. “I just can’t raise enough capital.”
For my co-founders and me, the next month was a whirlwind of calls, investor meetings, team huddles and some begging to keep the company alive. We made it, but it was a harrowing ordeal. If you’re an entrepreneur long enough, you most likely will experience this yourself. Here’s what you should do if you ever run headlong into this situation.
Engage in scenario planning.
First things first. Huddle with your team, and engage in a series of scenario-planning sessions. Map out and plan the results of a “worst possible” outcome and a series of other eventualities so you at least have an idea of what may happen -- including having to shut down completely.
At the very least, devise a strategy that takes into account what the office needs will consist of as it contends with a decreasing amount of money in the near term. You’re going to be searching for more funding as well as making cutbacks (more on that in a minute). In the meantime, you must have a plan in place for your strategic ops moving forward.
The starting point for your scenario planning is timing. How much time do you have before the cash is gone? If you have a small team and only three weeks before you think you can ship a completed product and get paid, you may be able to pull it all off with minimal funds -- and fuss.
Ensure all other investors are still on board.
Once you know what scenarios you can realistically count on, start calling all other investors immediately. The goal here is to ensure that every other investor is still on board with you. Do they believe in your business? Do they trust that you can raise more capital to cover the unexpected shortfall? Do they know another individual or company that would like to invest in your company?
This is perhaps the most critical step, as one investor pulling out -- even for reasons that have nothing to do with the promise of the business -- can cause a cascading effect that leads to others pulling out.
Calling and having this conversation with investors isn’t an easy step to take. You’ve most likely convinced these folks of the virtue and efficacy of your business model or product. You’ve sold them on where you hope to take the company in the coming years. As tough as it may be to keep some of the investors on board, it’s only the first part. Now it’s time to double down, and get them to invest even more.
Get other investors to make up the shortfall and hit the road.
Since you’ve probably told other investors about the shortfall, give them the opportunity to make up the difference. It is likely that many will -- and possibly even be happy for a bigger piece of the pie.
Use every tool in your arsenal to do this convincing since time is critical at this point. Your arsenal could include discounts, super pro-rata rights, rights of liquidation, changing stock classes, and even board observer or board seats. With many suggestions and strategic interventions in mind, go out and immediately hit the road to get other investors in the round. Offer the same preferential terms to each of them. Go after these individuals as if this is the very first time you have done this for this particular round.
Be open to accepting a series of new business milestones from an investor offering a cash-infusion. Work with them candidly to identify those specific milestones as well as the money you receive upon reaching them. Once that’s been solidified, take a hard look at what needs to be done to get those milestones accomplished and then make visible the steps you will execute to make this happen.
Make immediate changes where appropriate.
Here’s the stretching part that may hurt the most. Don’t wait to make cuts in costs wherever you can. Cut founder salaries. Cut all expenses to as close to zero as possible. Put a hold on all accounts payable. Ensure that very little cash leaves the company -- especially if you have very little runway left.
There’s an important point to make here about product. Your most vital adjustment may be to whatever you’re shipping. I strongly recommend limiting -- at least for the time being -- the set of features you’re offering with your service. Now is the time to scale back to the minimum viable product (MVP) and push forward from there. It is possible for the bells and whistles to wait until you’ve proven there’s enough demand.
Be open, honest and constructive with your employees.
While all entrepreneurs want to portray an image of ambitious success to their colleagues, in these situations honesty goes a long way. Be open and honest with employees about the situation, and be careful to explain to them the very real risk facing the company. You will absolutely be amazed at what your employees will do for you if you have treated them well and been honest with them. Many companies have been saved by their employees.
Even more importantly, you should give employees something constructive to contribute. Do not doubt their very real ability to save the day here -- whether they find you an investor connection or furlough pay for extra equity or other instruments. Often, you’ll find extraordinary loyalty in times like these.
Part of what’s going to generate this level of loyalty is how well you’ve been able to make your team feel invested in the company. Have you hired people who really understand the mission of your business and believe in it themselves? If you have, you’ve given yourself an insurance policy of sorts that can get you through the toughest of times.