Dear Entrepreneur: 3 Ways to Mitigate Risk in This Uncertain Time
“You are burning about $50k per month, right?” I asked
“No. I’m burning $80k per month,” he answered.
When Anders* said $80k, I immediately multiplied it by 12 and thought, “He is negative $1 million for this year.” It was then I had this empty feeling in the pit of my stomach.
You see, I am just not comfortable running a company that’s burning $80k per month. I have to know I have room to be wrong.
Room to make mistakes.
Room for the economy to do something other than what I expect.
Room for sales to miss their numbers.
Room for the customers to decide, against all reason, they will cancel.
I need room to live
Later the same day, I get a call from Sam. He has a $1.5 million term sheet sitting on his desk. But he doesn’t like the restrictions and risks associated with this deal. In addition to the dilution he and the other shareholders will suffer, he can be fired for any reason. He will become an “at-will” employee in his own company.
He will probably pass on this deal. He’ll risk losing his company, but it will be in his hands. He believes in his market. He believes in his product. He believes in himself. He will make enough sales to cover expenses and grow the business.
That’s the bet. He’s been doing this for three years. He’s poured his life into this company. This company is his dream. And now with Covid-19, his market is finally buying!
Another entrepreneur is burning $150k per month. He closed on a $3+ million round of financing right before Covid-19 hit. He believes he has to keep building his company because his market is blowing up. “If I conserve cash to extend my runway, I’ll be alive when all this is over, but I will have lost my market. What good is that?” he asks. “My investors didn’t invest so we could stay alive. They invested expecting me to build a company and win the market.”
I could go on, but I think you get the picture.
Entrepreneurs everywhere are facing tough cash decisions. Decisions they need to make without any useful data. There is no consensus on when the economy will come back. Will it be a “V” recovery, a “U” recovery, or a “Nike swoosh” recovery. Nobody knows. But entrepreneurs have to make an assumption and then a decision. They are betting their company. More importantly, they are betting their dream. They are all in.
3 Ways to Mitigate Risk
The Feds PPP program
Your sales close rate
Triggers and timely decisions
#1 The Feds PPP Program—Take It!
Take the money. The Feds put a program in place to give you two months of operating cash. Cash to keep your company going without laying anybody off. And everyone expects this program may be good for an additional month or two.
The cash gives you the time to continue to test economic and target market assumptions. This is the “let’s see how it goes” strategy. And this is the only time you can employ it because you have free money. Yes, free cash. You’ll never see this kind of money again in your business lifetime. Take it. Take the time it gives you to make a better decision—hopefully, the right one.
#2 Your sales close rate
You’ve made some market assumptions. You believe you will close enough deals to close the negative cash flow gap before you run out of cash. This is easy enough to measure. You will either close business during this “PPP float the boat” time or you won’t.
Hero or Goat, that’s the choice here.
If you are right and your market turns on just like you forecasted, then you will be a hero. The media will be writing articles about you and your boldness and courage in business. If you are wrong, you will be a goat. No one will care. You will just be another casualty caused by the Covid-19 economy. You will be one of the many who lost their company. Unless...
#3 Triggers and timely decisions
Decide now, before you get into the thick of the battle, what you will do “if.” If sales take way longer than you thought, if your current subscribers don’t relicense at the rate you assumed they would, if the Feds don’t extend the PPP loan program another two months.
Every “if” has a trigger. If this doesn’t happen, then you must make a decision right then and there. This is a decision that will determine the life or death of your company. Yes, it is that serious.
The general advice in times of high uncertainty like these is to conserve cash. The brand name VCs are pumping this message to their investments. I’m hearing the angel investors saying the same thing. Heck, I’m giving this advice. It is the safe path.
I find myself hearing my angel friend Greg in my ear. If I heard him say this once, I heard him say it a hundred times. “Remember, you must be present to win.”
Being an entrepreneur means being a leader.
Being a leader means making decisions which carry the fate of your dreams and people’s livelihoods.
This is what you signed up for, but you are not alone.
Leaders in all organizations, from startup to government, are in the same situation.
Dreams are at stake.
People’s lives are at stake.
President Trump said recently, “The decision on when to turn on the US economy is the biggest decision of my life.” And he is right. People will die from Covid-19, or people will die from a strangled economy. What to do?
All names have been changed.