The Funding Spiral of Doom
There is a situation we see far too often which is horrible to witness and we call it the "Funding spiral of doom"! It becomes an impossible situation to pull yourself out of once sucked into the vortex and so many early stage tech businesses get plunged into the struggle for cash when they've started to gain initial traction but simply can't raise the funding needed. When the fundraise fails and cash is critical, the cycle typically flows like this;
- Key features desperately needed get pushed further out
- The general business momentum gets killed
- Specific traction areas tail off
- The team’s morale dips
- Stress really builds
- Panic sets in
It’s a cycle that's too common, so let's understand why this happens, how did you we get to the position in the first place? It’s down to 3 things;
1) Revenue takes longer than forecast
2) Costs are always higher than expected
3) Fundraising takes so much longer
The founder has been head down, trying to build a business, doing the things that create and show real validation, but;
- Despite all the positive signs that customers will convert, it’s just taking longer
- There's always something you desperately need to spend money on
- Everything either costs more, takes longer to complete or there's unforeseen costs
- Your cash runway is eaten into rapidly, certain costs now need to stop
- You tried to gamble solely to get to revenue
- You pushed back raising way too late, but you're at least 3-6 months late to the party!
You are now heading into the inevitable Funding Spiral of Doom...
Now you're forced into full time raising and your precious, beautiful momentum is wilting away and you're forced to get into fundraising mode from a position of weakness, whilst juggling everything else with no funds.
You try rush the process and go into it underprepared and you’re starting reach-outs and don't have a clear pitch deck and something that looks like a fag packet financial model, which was pulled together on the bus so your credibility is not off to a great start and you now don't appear to be very investable.
You're then slow to respond to information requests because you have little backup prepared and investors switch off as they sense you're not in a strong position and get cold feet.
It’s then a huge uphill struggle to get early round momentum and the long slog kicks in with more outreach, more conversations, more time, more stress and the cash hole is getting deeper.
You then need to start considering expensive bridging rounds, dropping the valuation or cutting back on the really crucial key tech development that was going to get you your next revenue stream finally live.
The spiral goes on and on....
A horrible period where months or even years trudge by, mental health suffers, your passion and vision are being kicked from all angles and you just want to jack it all and go back to the secure salary, working for someone else doing the regular and secure 9-5.
But there is a way to try to avoid it!
You can mitigate this with a raise strategy and getting ahead of the curve with proper planning and knowing the rules of fundraising!
The key things you need to know are:
- An external fundraising campaign can take anywhere from 2 - 6+ months when your network is warm but it needs preparation time of 4-6 months to get to this point. So, get ahead of the game as being reactive never works
- Always be in fundraise mode, laying the foundations with potential investors as part of your weekly activity, you can’t turn off the tap or it will dry up quickly like a wilted flower
- Budget for 60%+ of your time to the process, it can be a full time job for some! It will consume a lot more of your time than you want and you need to understand what task will get put on the backburner
- You must have a realistic cash forecast with a few scenarios so you don't try to achieve the over ambitious
- Find people in advance that can help you on the important aspects - deck, model, legals, outreach, etc
- Set mini milestones so you can provide proof of execution and good news stories
- Get your materials in order ready to go, so they just need a refresh when ready
- Create a budget for the process and add it onto your raise amount
Always easier said than done when wearing 10 hats and juggling chainsaws, but if you can avoid the Funding Spiral of Doom and months of misery then get yourself a raise strategy at the very start and be one step ahead!
If you need any help on this then contact us at email@example.com or sign up to our platforms freemium version to sample how easy our canvases are to use and take your first steps to smashing your fundraising goals and becoming a FundingHero today!