182: What to Do When Your Financing Falls Through in the Last Minute
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In this episode, Steli and Hiten teach you what to do when your financing falls through in the last minute. Every business plan includes a heavily researched and projected financial plan. However, there are a lot of internal and external factors that can directly affect whether or not you’ll be able to reach your goals. Worst case scenario, your projections may even fail at some point. Tune in to know what to do when the unexpected happens.
Time Stamped Show Notes:
- 00:04 – Today’s episode teaches you what to do when your financing falls through
- 00:35 – In the past 2 weeks, Steli had conversations with founders regarding this financial matter
- 00:59 – Different reasons for investments falling through will vary, it could be cash flow problems
- 02:25 – These problems have been more common now
- 03:15 – “Don’t count on it”—in regards to the investment
- 03:34 – “You have raised shit, if the money is not in the bank yet”
- 03:53 – Have options for your finances
- 04:31 – You’re never fully in control of the outcomes
- 04:59 – The real issue in financing problems happens way before the worst moment you’re in
- 06:02 – Be preemptive and do NOT put all your eggs in one basket
- 06:48 – Most scenarios Hiten have seen have all been very specific
- 07:30 – “Figure out what you did wrong”
- 07:37 – Pitch to new investors
- 07:54 – Steli shares a story about a founder being honest
- 10:20 – Steli told the founder that he cannot speak for them and that they need to weigh their own decisions
- 11:20 – Be transparent with your investors
- 12:49 – Be mindful of not imposing your own moral compass
- 13:30 – Do NOT lie to your investors – you don’t win that way
- 14:06 – Don’t talk shit and don’t wear your emotions
- 14:20 – Founders do wrong by wearing their emotions and talking shit about other investors
- 15:57 – Talk to your co-founders to get the negativity out of your system
- 16:18 – Be rational when talking with investors
- 17:52 – Steli talks about short term actions founders should take
- 19:19 – In some scenarios, it’s better to just close down the business
- 19:51 – You don’t want founders to work on a company that’s just not going to profit
- 20:51 – Listen to Episode 143 when you consider shutting down your business
- 21:41 – Do everything and anything possible for something that’s worth it
- 22:21 – End of today’s episode!
3 Key Points:
- Investor money is NOT the only option you have—be proactive in finding those other solutions.
- You’re never fully in control of the outcomes, but having control over your company is better than investors directing where you should go.
- Transparency regarding your finances is key.
Steli: All right, you start.
Hiten: Check. Hi, this is Hiten Shah.
Steli: And this is Steli Efti, and in today’s episode of the The Startup Chat, I want to talk to you about what to do when your financing is falling through in the last minute. So, the reason I want to chat about this with you today is that in the past two weeks, I had four different conversations with founders where the basic theme was that they were just about to close a financing round, and it has either fallen through completely, or the round or the financing is some kind of in a crisis. There have been different reasons why. For two of them, it was the main investor that … The lead investor pulling out and in two other cases there are slightly different reasons for why financing has become much much harder. One is that the lead investor all of a sudden has brought up a lot of terms that are just incredibly aggressive and were never agreed to.
Steli: And in the last case it’s actually something totally different. In the last case, financing has not fallen through but the company has just gotten into a situation where they’re in a sudden cash flow crisis and they have to pull 50,000 dollars out of their ass and the money is not there and the financing is gonna plan to be closing in two months so they have to figure it out until then. At least that’s what they think. So there’s different reasons for why they’re in this kind of crisis mode but the theme is financing was around the corner, everything was going well in their minds and now, boom, something has happened, somebody pulled out, somebody has put in really aggressive terms so it’s changed something and they now are afraid that the entire financing is going to fall through and that creates a massive crisis situation for them. I’m sure you’ve seen this and heard this scenario a number of times. I can’t imagine you not, right?
Hiten: Yeah, it’s very common and I think right now it might even be more common than usually just because there’s some kind of depression around investors being a little more conservative when they’re writing checks and there are also a ton of investors out there and that doesn’t help either because the more investors there are the more that there’s … Especially new investors coming in to the market, they don’t necessarily have the same processes and rigor that maybe investors that have been doing it for many years have. Especially with this lead investors. It’s really sad when I hear it. Sad in the sense of like when investors pull out, that’s a very negative not on the company as much as on the investors. And so this happens over and over again. The simplest first thing to say is this really sucks but it’s true is, don’t count on it. Don’t count on the investment, I’m sorry that’s part of the problem here.
Steli: I love that. That’s the first tip. I remember I gave a talk once about the seven deadly fundraising sins and the last one was, you haven’t raised shit if money hasn’t hit the bank yet. You cannot expect that it will happen until it has already happened. And that’s such an obvious thing. It’s also annoying I’m sure to hear when you’re in that situation. But having options is a powerful thing, and banking everything on a financing to work out and if it doesn’t work out your company is in a life or death, or in a near-death experience situation. It just means that you’re playing a very high-risk game. You’re playing a game where luck and random chance and other people’s actions plays a more important role in the future of your company than what you can control yourself and influence. Which makes me always a little bit uncomfortable. I love to be in control of the outcome as much as possible. You’re never fully in control but I want to have a significant amount of influence over the outcome when I can. So it always sucks when you aren’t. Let’s say that, obviously there’s things I’d like to tell these people like drive more revenue earlier, get to cash for profitability, have multiple options, that’s just one financing option. I think that a lot of times the reason for you being in a financing crisis, a last-minute crisis, the real issue, the root of the problem, has happened way before this moment. It happened in the moment when you put all your eggs in one basket or you put all your hopes into one investor’s hands or you didn’t feel the need to be more frugal with your burn rate and your … There’s a lot of mistakes that probably have happened or things that have happened that have contributed to this being as big of a crisis as it is. So ideally, in order to preempt you ever being in this situation, you do all the right things beforehand. But let’s say that that ship has sailed and we’re talking to you as a founder right now and you are in this situation. Me telling you you should have be more frugal or have added more options a year ago, that’s not gonna help you right now. Right now we’re trying to close a financing, lead investors pulling out, you’re afraid that all the other investors are going to leave once they know. What do you do?
Hiten: Yeah. It’s … I mean in one scenario you find another lead investor. In another scenario it’s more about being preemptive about this and not putting, again like you said, not putting all your eggs in one basket and making sure you always have a secondary option, ’cause it’s likely if you’ve gotten all the way to one firm committed, there would have been at least one or two others that would have committed or at least gotten so far. So having a back-up plan and knowing, like you said, that the money’s not in the bank before the money’s in the bank, is super critical. Honestly a lot of this has to do with the relationship you have with the investor. A lot of it has to do with, has there been enough diligence and disclosure about what’s going on with your company before you actually get this far down the line. One of the hesitations I have about giving any real solid advice on this stuff is most of the scenarios I’ve seen end up being very specific. So maybe there’s seven reasons, seven different reasons, that someone would pull out like an investor. But a lot of it, honestly, has to do with their end, not your end. Especially if you got all the way to … Very close to a term sheet or even a signed term sheet. It’s a shame that this is becoming more common and I can’t believe that you just had three of these in the last couple weeks. That’s a little … That’s probably a sign of something. But there is no … You don’t control the investor. The investor gets to decide if they give you money or not so I think that reminder is a strong reality check for a lot of founders that go through this. At the same time, it’s just like everything else. Figure out what you did wrong and figure out if there’s any contribution to that on your end and after that the scramble is really about pitching new investors and ones you haven’t talked to, or going back to ones that were really excited and honestly either being really honest with them or just turning the conversation back on.
Steli: Let’s talk about that for a second, the honest part, because here’s an interesting scenario I had in one of those cases. In one of those cases the founder was in this situation where it was clear that the … Oh, sorry.
Hiten: I’m here.
Steli: Oh. So in one of those cases the series A … It was clear that the series A wouldn’t close now and it was pushed back, whatever, two, three months down the line. The founder knew that he would probably have to raise a small bridge round.
Steli: And was believing that he was capable of doing that but the larger issue was that the original series A, that lead investor was … It didn’t just get pushed back a little bit. The lead investor acted in ways that made that founder think he doesn’t want to take money from them three months down the line. The founder knew that he would try to find another lead investor in the meanwhile. But now the question was, that he was asking me was, “If I raise this bridge round with my past angel investors, do I pretend … I can easily pretend that the series A round is just pushed down a little bit, we’re in really good shape, we’re just raising a small round just to be safe and all that, and let them believe that the round in the original investors involved with it is still fully intact. Or am I honest enough to tell them that it is but I actually don’t want one of them anymore and I’m gonna try to find somebody else, in which case they might see that series A round threatened and maybe not as comfortable in giving me more money right now.” How honest am I? Because if I’m not fully transparent about the situation I might have a very easy time to raise the bridge round and then, if I’m fully transparent I might not and then I’m in a really crisis mode. And I know what I told him and I have a good sense what you probably would tell somebody in that situation, but I think the audience would love to hear it and I’m still curious. What would you tell a founder in this specific spot?
Hiten: You first. You first.
Steli: All right. So my … I’m not trying to tell somebody what their internal ethical guideline and compass should be, right, and I think there’s plenty of examples in the start-up world of founders crossing over some ethical lines in your own internal judgment system and getting away with it, right, and doing fine. I told that founder that I can’t speak for them, they have to make their own decision. If I was in the situation today, I would not feel comfortable lying or being … Or hiding it because I’m thinking really long term here and if the angel investor … These people are people I hopefully want to work with the next 10, 20, 30 years of my life. If I hide things from them, A, I will feel horrible. I think it’s going to translate into the way I pitch and the way I communicate with them. There’s gonna be some kind of a guilt in my voice. There’s gonna be a certain weight on my shoulder. It’s gonna make work less fun. It’s gonna create a lot more pressure and stress for me. But it’s also going to harm the relationship long term. It’s gonna feel like I’m stealing money, I’m lying to people. But I also don’t think in his particular situation, I said that if I was in that situation I don’t think I’d have to tell people, “Hey, I hate that one investor and the round is not gonna happen but I need a bridge round.” I told him I would probably be transparent to them and tell them, “Hey, I’m trying to make the series A happen. This one lead investor has acted in ways that make me a little uncomfortable so I’m gonna use those three months to try to see what other interests are out there and create more options for the business because I think that’s good. If there’s no options on the table, we can regroup and decide if we still want to go with that investor or not. But that’s kind of how I feel right now. Right now we’re raising a bridge round, we’re planning on an A, but we’re also with one of these participants in the A that has acted in some ways that needs some investigation and we need to see if we’re really gonna … If it’s in the best interests of the company ultimately to take money from them.” Just be frank and honest and if that freaks out an angel investor and it makes them not want to help you with the bridge, then I think that it would be a bad idea to take their money anyways. And if it doesn’t, now you have real alignment, now you have people that know what the situation is. Maybe they’re gonna give you advice, maybe they’re gonna be able to help you find another lead investor. You’re creating, through transparency, you’re gonna create a situation where these investors don’t just give you money but they’re gonna be able to help you manage this tough situation and get to the end result and the best outcome for the company, versus you having to come up with everything on your own while you’re lying to group A, you’re lying to group B, and you’re trying to develop a new group of people. That’s what I would do, but I also try to be mindful of not trying to impose my own compass or my own way of thinking onto others as if it is the right way of thinking or acting. But that was the advice that I gave him.
Hiten: Yeah, I mean for me you can be straight up. Are you an honest person? You can just ask the founder, “Are you an honest person? Do you believe you’re an honest person?” That’s actually how I usually start the conversation. It’s rare for anyone to say no, but then you can see by how long it takes them to say it, the resistance in their voice. And then you give them a strategy, that would be my approach. The honest, honest truth about … Don’t fucking lie to your investors, future or potential or current investors. Just don’t lie to them. There’s no … You don’t win that way. You don’t get anything that way. You get a lot of negativity and if you plan on having more companies and wanting investors or wanting to raise more money, the last thing you want to do is get caught in a lie with an investor. It’s death, honestly.
Steli: Yeah, but, but-
Hiten: ‘Cause you have to find new ones that don’t know you lie. Now here’s the thing. Let me give you my caveat ’cause then I think it will cover what you’re about to say.
Hiten: The caveat I would give is simple: Don’t talk shit either, and don’t wear your emotions. This is business, so don’t sit there and badmouth the other investor or anything. Just be super factual about what happened, ’cause what I see investors, sorry, founders do wrong, is they’ll sit there and they’ll be honest but they’ll wear all their emotion. They’ll wear their sadness, and they’ll essentially get to the point of talking shit on an investor that in their mind screwed them over. The investor probably didn’t screw them over, there’s just a bunch of things that happened that are out of the founder’s control. But they take it personally and then they emote all of this back onto whoever they’re talking to. And that’s okay, you’re talking to Steli or me or some other founder, go for it, bring it on. We do that a lot. But when you’re talking to an investor, be businesslike. That’s the best thing you can do.
Steli: Yeah, I love that. So that was one of my caveats. The other one is, some people are just sociopaths. Some people just have no problem lying at any time. A bunch of them get away with it in life. Fine. I don’t want to be you, I don’t want to have anything to do with you. But if you’re you, it works. I’m not gonna pretend that these people never get away with it. You can lie and be very successful. There’s very prominent examples right now in this country of lying instead of the truth if you can get away with it or not. But if you are not a liar, if you’re somebody that’s honest, I think it’s a bad idea to lie. It’s just a bad idea. It fucks other people over and it creates a lot of bad relationships. It’s creating a bad reputation for you. But it also … You’re not gonna be able to do a good job. You’re gonna be all conflicted within yourself, which is the worst kind of conflict to have to begin with. So just don’t do that. The other thing that I think is brilliant which is the … Talk to your co-founders to whine about things, to complain, to be all emotional, to be weak, to be in doubt. All these emotions are human, they’re natural, and they’re fine. Get it out of your system with people that are proper in that context. And then when you talk to investors, be rational and seem like you have clarity and you know what you want to do next. Don’t complain, don’t whine, don’t talk to investors and be all like, “Oh my god I don’t know what to do. Should we do this or that? I don’t know, I have these problems.” Because obviously that … If it’s harsh or not, that’s not gonna make me as an investor go, “Yes, let me give this person more and more of my money, ’cause that person is gonna seem to be able to deal with the pressures and ambiguities and challenges and their own emotions around them.” It sucks but that level of honesty is counterproductive when you’re asking for money because it makes me as an investor feel … That emotion translates over to me. So if you’re all in panic and you talk to me in a panic mode, it’s gonna put me in a panic. If you seem calm, clear, cool, collected, it’s gonna make me, even if it’s a crisis, it’s gonna create confidence and comfort in me. It will make me go, “You know what, I think this person’s gonna figure out this crisis. My money’s in good hands with this gal or guy.” Make sure that you’re honest but make sure that you have collected your thoughts and have a game plan when you talk to people and that you don’t badmouth or complain or whine around other people.
Hiten: Yeah, I think that that’s the biggest tip we can give in this scenario. Just be honest. Unless you’re a sociopath, then don’t be-
Steli: Don’t be honest. Then never be honest.
Hiten: Just be a sociopath. Go for it.
Steli: One more question here, which is in a few of these scenarios of these founders coming to me with their financing crisis, there was a question that was around some short-term actions that they might have to take that might or may not negatively affect the mid-term financing hopes that they still have. So there was a, “Should we cut costs right now. But if we cut costs really radically, immediately, it might affect our growth in the next three months or it will affect how much we grow in the next three months. And in three months we’re trying to close this A round.” So there was some conflict around doing things to create a better scenario, a better short-term scenario that might harm them the still-existing desire of closing the financing or closing the round down the line. Letting go of people, stop spending on advertisement, bringing down . All these kind of scenarios. How frugal should we be? How much should we cut cost? And will that be shortsighted or is that prudent and the wise thing to do in this situation?
Hiten: Yeah, when you’re running out of money you just have to be really smart about how you cut. You don’t want to cut anything that’s going to hurt you. At the same time, if you really believe you need to make the company survive then you cut as deep as you have to to get the run rate you need. It’s really the problem of run rate and how long it’s gonna take until you can raise money. In some scenarios it’s better to just stop and return whatever money you have, if any, or whatever it is. That’s not what everyone wants to do but I’ve been through this before myself, I’ve helped many founders do this, and the option they don’t think of, the last tip I’ll give about this one is they don’t think about shutting it down. They don’t think hard enough about that. That’s actually where I’d start. Well, you can’t raise money, they backed out, what about shutting it down. It sucks, but the thing you don’t want founders to go through is working on a company that’s just not gonna work.
Hiten: It’s just not gonna work. Nobody wants to hear that. These are some of the hardest conversations I have with founders when they hit that scenario. I’m like, “Well, it didn’t work. You can’t raise the money. You can go pound it out for a little bit, pound it out meaning ignore it of investors and see if it’ll work. But at the end of the day you’re gonna have a skeleton crew, your team gets demotivated. What’s the point if you can’t get the money and if you don’t have conviction that you can get it?” So even cutting deep might not be the best solution when most people, that’s their only solution. Anyways, I wanted to put that out there. Sometimes it’s better, just move on.
Steli: Yeah, I think that this is super crucial. It’s a painful thing, it’s not very inspiring, it’s not the happy dappy way of advising somebody in these situation. But it’s the honest way, and it’s a truth that most people don’t want to hear or don’t want to even contemplate. Make sure you’re recording the episode. This is one that everybody should listen to. It was episode 143. One forty-three, the slow and stressful way to kill your start-up or how to make a decision if you should keep going on or not. Listen to that one. If you’re wondering if you might have to consider shutting down the company, you should listen to that one and think about … Use a rational framework of making that decision versus an emotional one of like, “I’m gonna lose my face and we’ve been working for so long.” And the sunk cost fallacy of, “We’ve put all this into this and we’re so close to making it.” Listen to this and make sure that if you take extreme measures, make sure that you have a good chance of making these extreme measures pay off for you and the business. Don’t just take them to take them. Don’t just take them because you feel obligated to do everything and anything possible. You should do everything and anything possible for something that’s worth all that risk and all that energy and all that money and all that time. If you’re in a crisis mode and financing is breaking apart, maybe you’re not lucky. Maybe you chose the wrong investors. There’s many reasons to be in that situation that would not lead to you should stop your company. But there are a good amount of times when financing breaks apart and when you have difficulties to raise money where the reason why all that is happening is that the business is not in a good-enough shape and maybe you shouldn’t continue. All right.
Steli: Yeah. I think that’s it from us for this episode. We’ll hear you guys very soon.
Hiten: Till next time.