September 27, 2022

Less than 12 months of cash and don’t have product-market fit?

Rachel Star
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Less than 12 months of cash and don’t have product-market fit? Less than 12 months of cash and don’t have product-market fit?
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Editor's note: 

WHAT to do WHEN you have less than a year of runway


What do you do if you’re running out of runway and haven’t reached product-market fit? It’s an all-too-common question that founders ask — or should ask — especially when they have less than 12 months of cash in the bank. 


First things first: If this situation applies to you, you’re not alone. Many companies build great teams and work hard on their product but don’t achieve product-market fit. The down side of the power law in startup land is that most of the companies don’t manage to achieve the success they set out to achieve. Second, you need to realize that you do have options and that there are best practices to follow. Our goal is to arm you with the right questions to ask and actionable steps to prioritize — while ensuring you take care of employees and manage the situation in the most communicative, efficient way possible.


Of course, your goal is to keep trying to find product-market fit — and position the company to raise additional capital — but it’s worth knowing your options:


•      Plan A: Keep trying to reach product-market fit (and raise additional financing)

•      Plan B: Sell the company

•      Plan C: Shut down / dissolution


If your startup is struggling to achieve product-market fit, you must evaluate different expense scenarios and the cash-out dates associated with each. You should look at the trajectory of the business and assess whether it’s likely that you’ll raise your next round of funding. If it’s unlikely, start exploring a Plan B or C — and the sooner, the better.


In this guide, we’ll walk you through WHAT to do WHEN, so you can manage the process as smoothly as possible. 


Months of runway remaining: 12

Assess your likelihood to raise your next round


If it’s taking longer than expected to reach product-market fit, it’s critical to realistically assess your likelihood of being able to raise the next round of funding. 


Keeping your investors informed along the way can help you tap into their expertise and knowledge of the market and give you a better idea of where you’re headed. Investors have a good read of the market and the milestones you need to achieve to increase your chances of raising new capital. Speak with them frequently about your progress in achieving the milestones and whether your company’s on the path to raising the next round. Hopefully, you’ve been having these conversations all along — but at a minimum, start the dialog when you have one year of remaining cash, and then check in at least every four weeks.


During this assessment phase, you must communicate any new or revised goals to your employees. Encourage everyone to rally together to best position the company to raise additional capital. Operationally, the main thing is to identify the key milestones to attract new capital and make certain that everyone on your team clearly understands how to achieve them. 


Months of runway remaining: 9

Begin exploring acquisition


If at nine months, you’re not on a likely route to raising more funding, it's time to start exploring Plan B: an acquisition of your company. 


To keep things calm and collected, start a dialogue early with potential buyers, even if you have strategic reasons not to let them know that your company might be for sale. You can start by discussing areas of strategic alignment or a potential partnership. It’s your job — not theirs — to craft a narrative describing how your company complements theirs and how the pieces come together. The sooner you open the right doors, the easier it will be for them to see you as an attractive acquisition target — and not someone who needs rescuing because you’re nearly out of cash.


It might also be wise to initiate conversations with two or three investment bankers — you should target those familiar with your industry and potential acquirers. It’s worth noting that talking with a banker informally is different from signing up with one. Even less formal conversations might raise worthwhile points for you to consider when deciding the best route to take. And when it is time to engage a banker, you will already be ahead of the game.


While investors and bankers are excellent at advising on and executing transactions, a banker’s primary function is not to find a transaction for you. Finding a buyer rests on the shoulders of the founder or CEO

  • Make a list of possible buyers
    Which companies would view your company as a strategic asset in their portfolio of products? Is it an advantage for them to buy your company, as opposed to building your capabilities on their own? How important would your people, your intellectual property, and your other assets be to them?

  • Reach out to business unit leaders directly
    Leaders of business units are the people who run the product suite at the companies you’ve identified. They are the likeliest route to potential buyers — not corporate development leaders who are primarily responsible for executing transactions. As the founder or CEO, let business unit leaders know that you’re interested in a strategic relationship. If they buy into your vision and see a strategic fit, you’ve validated their possible interest in your company.


Be persistent. It may take several attempts to secure a meeting, but when you have one, be prepared. Get them excited about the prospect of exploring a possible strategic relationship.


Ensure that your presentation covers:

  • What your company does (product/service/technologies)
  • Your company’s strategic vision
  • The quality of your team
  • How a strategic relationship would be a significant advantage for both companies, e.g. how your product and their sales force or channel strategies would be a great fit.


Listen carefully and gauge their interest — be thoughtful about identifying the right moment to mention the possibility of being acquired. Of course, the best-case scenario would be for them to be so excited that they raise the acquisition question first.


While an acquisition wasn’t your Plan A, don’t hesitate to maximize the outcome. Don’t put all your eggs in one basket; pursue multiple possible strategic fits. Typically, the highest price or the best result for your shareholders and employees will be achieved if you can attract multiple bidders and create competition.


Months of runway remaining: 6

Catalyze an acquisition process


At this point, if a financing is still not likely, it’s time to get serious about pursuing a sale of the company. The clock is ticking, and any potential buyers will likely know it. To mitigate the possibility of buyers waiting you out, you need to create a sense of urgency.   


Force companies to either commit or bow out of the process. It’s just like any sales process — “maybe” is the worst possible answer. While a “yes” is best, a concise “no” is also helpful to avoid wasting your valuable time.


If you already have interested parties, hiring a banker (one that you met a few months ago!) can help you optimize the acquisition process in many cases. Since most boutique bankers prefer not to work on transactions below $50 million, if your acquisition were to be valued at less than that figure, it might make more sense to hire an attorney who specializes in mergers and acquisitions.


Either way, you’ll want to assemble an experienced group of advisers who will help to achieve the best outcome for the company, its shareholders, and its employees. Acquirers typically will be looking for the team to stay on, so an essential part of the negotiation will involve creating incentives for your key employees to support closing the transaction and staying on with the buyer.


Months of runway remaining: 3

Prepare to shut down


If Plan A and Plan B don’t pan out, it’s time to meet with a lawyer. Make sure you have enough money to cover your shutdown costs and can dissolve your company appropriately. It’s crucial to make sure that legally required withholding amounts are paid on time to the government, employee wages be kept current and liability insurance not be allowed to lapse. Your lawyer will want to understand your assets, liabilities, and commitments. Discussions with your key creditors (and especially secured creditors) may also be appropriate.


How should you communicate with employees about these potential situations? 


It’s best to be honest and reasonably transparent, especially regarding the key milestones that need to be achieved. Everyone needs to be on the same page regarding your business, especially regarding the goals to achieve the best outcomes.


That said, there’s no need to jump the gun and speak to employees about a possible acquisition too early in the process because things can change.

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