Each week, we see fundraising announcements from a handful of startups. But for most startups, each week ends without an announcement. It doesn’t mean that the announcement won’t eventually come, but like most things in life, it is taking longer and requiring more effort than you expected.
For capital intensive climate tech startups, the delay in raising capital can create serious challenges. It can require founders to make some difficult choices–from laying off employees to investing their own capital to bending every possible truth to convince investors to invest.
None of these are easy choices, but it is all part of running a climate tech startup. Let’s examine the consequences of a longer-than-expected fundraise and what founders can do to navigate it.
- Updated Materials.
A fundraise that extends across quarters or fiscal years will likely call for an updated financial plan, which investors will want to see before they close. If the updated financial plan isn’t as good as the previous version, then be sure to have a good story as to why things changed for the worse.
- Changes to Hiring and Personnel Plans.
One of the biggest challenges may come with your current and prospective employees. Often, founders identify employees they want to hire once the round closes. In the case of a delayed round, you may have to delay the start date of the new employee. To prevent that person from walking away, consider a consulting engagement as a low-risk way to onboard this new team member. In addition, be mindful of the conversations you may have to have with current employees if your cash runway becomes an issue. Founders should take themselves off payroll first. If they do need to take others, then understand what, if anything, you’re asking the team to do and how you will compensate them for it. Stay on without pay? Wrap it up? End everything immediately? The direction you take will have massive implications for your business.
- Updates and Requests for Existing Investors.
Your existing investors will want to know exactly where you stand, especially if you are running low on cash. Keep them updated and don’t hide bad news from there. Be honest about your fundraising challenges and let them know about all the work you are doing to keep the company rolling. If you have a request for them, especially if it involves a pass-the-hat or bridge round, then be very clear about the ask and be equally clear about what this ask buys you.
- The Bridge.
You may conclude that it is best to shift from a full-fledged Seed or Series A round to a bridge round to keep the business growing for the next few quarters. If that is the case, then be sure to lay out the following:
- The dollar amount of the bridge round and what it buys investors (spoiler alert: it should ameliorate the risk that prevented you from raising a proper round).
- The names of the existing investors that are participating. Do not expect any new investors to participate in your bridge round unless existing investors are participating.
- The opportunity for any grants or non-dilutive capital that could accompany the bridge round. Receiving non-dilutive funding is actually a great reason for a bridge round, as you can match the non-dilutive funding with dilutive capital and stretch it quite far.
- The timeline for conducting a proper round, and how you’ll be well prepared as the result of the bridge.
- Personal Bridge.
If you’re having trouble getting existing or new investors to join your bridge round, then you may want to attempt a personal bridge round. This means you putting your own money into the company. Do it because you believe in the company and what you are building. If you don’t want or need the money back soon, then structure your investment as equity rather than debt. But be very careful and make sure you’re financially prepared to make this investment. And whatever you do, do not raise this cash by using a personal credit card or a business credit card that you’ve personally guaranteed.
- Updated Story.
Whatever you do and however you aim to stretch your current cash position until you raise more capital, recognize that you will have to keep selling. Don’t lie, but be mindful that the story for your startup needs to be as compelling as ever. Make sure you’re mentally and physically prepared to tell that story and live that story every day as you build your climate tech company.
- Manage Expenses.
As you navigate all the issues that we’ve outlined above, take a hard look at your accounts payable and understand if there’s room in there around payment. To be clear,I’m not advocating for any startup to avoid paying their bills. What I am advocating for is a hard look at accounts payable to determine what expenses to cut and what vendors may offer flexibility (i.e., payment terms) on their outstanding invoices. Be honest with folks, work thoughtfully with them, and find a path forward that works for everyone.
As you navigate all the challenges set forth above, the goal is to find a financially viable path forward for your company that does not preclude you from completing that proper round some point in the near future. Be honest with folks, be creative with your capital, and be committed to your business, and I’m sure you can find a bridge that allows your amazing climate tech startup to keep fighting. No one said this would be easy!
