We are currently looking to raise. We have some serious leads but discussions are taking longer than we thought and a Tier1 visa investment has been delayed by Brexit, so we’re running out of cash. Is it wiser to get rid of people until cash comes in or to borrow money from personal contacts, or … ? I’ve tried asking our existing angel investors to top up their investment but none of them has been responsive so far. Should we be fully transparent with the potential investors to make them accelerate the process or is there a risk to lose them or to get a bad deal?
This is a common problem among startups where things are going OK, but not so well that investors feel fear of missing out. The lesson for other startup founders reading this is to plan your fundraising right from the start; do a reality check on your investors; and verify much earlier on as to how the fundraising is progressing versus how the cash pile is shrinking.
But you don’t have that luxury: you are where you are.
Broadly, I’ve seen two approaches work well. One is to get a loan — either from an existing investor, maybe in the form of a convertible where they get to invest in the round at a discount in return for supporting the company now, or from a venture debt provider or other specialist lender. Note that a reasonable timeline for outside lenders is a couple of months, and unfortunately you don’t have that luxury.
The other approach is to use fear rather than greed. You go to one or more of your existing investors, explain how well things are going with the business itself and how promising your future is, but warn them that they’re going to lose all their investment in the next thirty days unless they’re able to bridge the company by providing a loan until you can close the new investment. Give them evidence to substantiate what you’re saying, such as a term sheet and email correspondence from the investor whose money is contingent on getting a government approval. It’s also helpful to explain why this delay was unforeseen, to prove it wasn’t your screw-up. If it was your screw-up, then take responsibility honestly for not having planned ahead, and tell them that you’re going to learn an important lesson from this.
As for firing employees, it would certainly make sense to take action on anyone who’s underperforming and whom you should probably have let go anyway. Asking for salary sacrifices is less wise. A few key people who are super-enthusiastic about the company might be willing to delay some of their salary for a month, but be warned that it’s a perilous step to ask your employees for loans, which is in effect what you’re doing. The relationship is rarely the same again, even if they say yes.