Soft Landings And Acquihires: Watch The Cash, Stay Focused

Much has been written about the current fundraising environment. Smart entrepreneurs and innovative products that haven’t gained enough traction to land additional financing are simply closing their doors, returning what little capital is left to investors. Beacon and Secret are two recent examples of high flying shutdowns. In the case of Secret, the company had raised $35 million dollars and was valued at over $100 million less than a year before the founders announced they were shuttering the service.

Why does this happen? Why don’t great engineering teams get picked up by a buyer? Why doesn’t a strategic acquiror find value in the product or user base?

Startups fail for a variety of reasons. There are some great post-mortems compiled by CB Insights if you want to read more on the subject.

While the question of ‘why startups fail’ is certainly an interesting one to reflect on, when you’ve got six months of cash left, survival is your only concern.

At Station, we’ve been approached by a number of founders getting caught in the cash crunch, unable to raise a bridge round or secure additional capital from existing investors. Many of these founders feel a deep sense of shame about this topic and are nervous about even discussing their situation. You’ve built a product, dedicated several years or more to realizing the dream of sharing your product with as many customers as possible, and attracted a passionate group of employees and investors who have bought into your vision. And yet, for a variety of reasons, your company has not found product-market fit fast enough to attract new investment.

And the cash clock is ticking.

Fear not. The most important thing you can do now for your company and your employees is to address the situation honestly and have a plan. Here are some steps to consider.

  1. Be Transparent With Your Stakeholders. Your investors believed in you and expected to be with you during the good and bad times. Don’t wait until you can’t make payroll to share your situation with them. They also can help provide leads in their network. Making them part of the mission will also help you psychologically navigate this time period. Your attorneys, if they are good, can also be advocates and advise you on how to think about process (N.B. Make sure they’re off the clock!). Access their connections as well. With your team, it’s important to express honesty about the situation with the confidence that you are going to do everything humanly possible to preserve and grow what you have collectively built. Make sure they are 100% focused on the business. You personally, however, will be 100% focused on finding a home for your company and employees. This is now your job.
  2. Curtail All Unnecessary Spending. That hot PR firm that wants $10k in a last ditch effort to increase awareness? Nope. That additional intern for social media campaigns? Nope. If you and your co-founders can afford it, eliminate your own salaries to retain key team members during this time. Every additional month matters.
  3. Write Down Every Strategic Investor That Might Have An Interest In Your Company. Literally. Create a list that is 40 — 50 long because you’ll need to shake a lot of trees to get competition going. Growth stage companies may be your most fertile ground as they typically have the ability to move faster than large corporates.
  4. Negotiate With Giants Carefully. This is the point where most founders blow it. The first contact should come from someone known to you or your investors. Look on LinkedIn to see who is connected to the people you want to meet. Ask around the community of startups. After the introduction, you should try and have the first conversation over the phone. This is an opportunity for you to sell your vision. Remember, email doesn’t have tone so communicating only through that channel will be less effective and likely won’t achieve your ultimate goal, which is an in person meeting. When describing your situation, a statement that usually works well is “we’ve received inbound interest and are pursuing strategic alternatives.” In addition, remember that your startup is not the only thing a corporate development executive at a large company is focused on. There is a cadence you will need to respect. Make sure you take the opportunity at a meeting to ask for next steps and their timeline. Don’t incessantly email. Every interaction is an opportunity and should be carefully measured. These are sophisticated buyers. If you use a bluffing tactic about another offer, be sure you can back it up.
  5. Don’t Be Desperate. You’ve built something cool that has value. If you seem desperate, potential acquirors will feel your stress and wait until the cash runs out to pick up the pieces. Be confident. The fact that your startup didn’t achieve escape velocity is not a reflection of your talent or your product. Identify and quantify the value creation that your team and business can bring to a partner. When asked “what is your valuation”, point to the value created since your last round in terms of users / MRR / engagement. Do not say “our investors will take any deal that gets them recovery”. I’ve actually heard the latter more times than I can count.
  6. Expect This Process To Take Several Months. Board approvals, slow corporates, and simply the inertia of getting an initial introduction will not happen quickly. I believe startups that shut down fail to appreciate this early enough.
  7. Leadership. You’ll have sleepless nights and perhaps no one in the company that you can talk to about your anxiety. Reach out to friends who have been through similar situations for support. Remember, you’ve been part of something awesome. Keep close to your values and your mission. This is where they really kick in.

This is a very surface-level discussion of this topic, but we’ll continue to add to the conversation here. What’s your advice to founders facing a shutdown?

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