My startup’s been going for 3+ years and we’ve raised over $3m. This year’s sales are about the same as last year, so we’re not growing much.We’re a commission-based business with an industry-standard take rate — but after discounts, promos, costs and card processing, our actual margin on each transaction is tiny.
We have a big team and six months of runway, and my investors are pressing me to take radical action. I’m a skilled fundraiser and I think we’ll be fine if we can show 50% year-on-year growth via spending more on ads.
They’re pressing me to make more radical changes. Who is right?
Sad to say, your board is right.
When you raise from angels, you’re mostly selling the dream of what your company might be in five years’ time, plus your own talent and persistence. If you convince seed-stage investors of those things, you can usually raise money.
Raising at Series A is different. Investors want evidence of three things: real, money-through-the-door sales; month-on-month growth in those sales; and strong unit economics proving that you make plenty of margin on each transaction. If you can deliver all three, you’ll find it easy to raise. If you can deliver two, you may succeed. If you can deliver only one, your only chance of raising more money will be either because you’re skilful and magnetic enough to distract their attention, or because you find investors who are aren’t smart enough to see the weaknesses of your business.
Remember that in most startups, whose backers have portfolios of dozens of investments, the cash they’ve put into your business is much less material to your investors than the time you’ve put into it is material to you. If they’re expert investors and they’re worried that your business isn’t going in the right direction, take their warnings seriously.
Radical action now — whether it’s firing half your team and going back to the product drawing-board, or making radical changes to how you market and sell the product, or changing your pricing or your target market — will undoubtedly be painful. But it’s much less painful than being two months away from your cash-out date and looking for a face-saving ‘acquihire’.
Admitting that things aren’t going well and that you need help has another benefit, too. Investors are much more keen to back people who can learn from their mistakes. Proving that you’re coachable will preserve your relationship with your existing backers. It may not save this startup, but it will save your reputation for the next one.