July 16, 2013 Ben Horowitz from a16z : Capital Market Climate Change

If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts. Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating shit is horrible, but is far better than suicide. When you go to fundraise, you will need to consider the possibility of a valuation lower than the valuation of your last round, i.e., the dreaded down round. Down rounds are bad and hit founders disproportionately hard, but they are not as bad as bankruptcy. Smart investors will want the founders and employees to be properly motivated post-financing, so there may be a way to a reasonable outcome for both you and your people. Make sure that you figure out what kind of deal is better than bankruptcy and be sure to communicate to both your existing and potential new investors what you think makes sense. In this situation, it’s better to start low and get one bidder that may lead to many and the market-clearing price than have no bidders and the dream of a high price. (read more…)

CATEGORY: downturn, leadership, profitability