SPEED KILLS: Use experience to avoid crashing your startup.

This past week I was in “UberLand”, the dreaded zone of over-commitment that generates heroics. It is never good to go there.

Why did I go there? Because a first-time founder needed some extraordinary help. 

A great VC with a positive attitude had arranged for a quick loan (“bridge loan”) so the startup could meet payroll (Pay day was coming up in 14 days and the startup had run out of cash). The VC was part of a group (“syndicate”) of VCs in the last weeks of closing on a large round of financing for the startup.

So I began working day and night to assist this startup complete its first bridge loan. Every legal step had to be done yesterday. Bank accounts had to be created, along with a ton of documents used to prove the company was not in the drug money laundering business. That required a bunch of permissions in the form of legal resolutions by the board of directors, all of whom were traveling on business in various continents of the world and each had to sign and pdf many emailed documents by the hour. And then there were the loan documents and more signatures. And, and, and. 

What happened? In spite of extraordinary efforts on everyone’s part, the startup needed 24 more hours to avoid missing payroll. The banks were closed for the American Thanksgiving Day. Yes, after the immense energy expended, this startup founder missed the payroll funding goal. (But it was not the end of the world: both of the co-founders had wisely kept the employees up to date on the VC financing that has been going on for three months, so no one got upset.)

But for one of the first-time entrepreneurs, that spelled “failure”. And he is Asian so that added a bit of face-losing sting. He now has added this experience to his lessons learned in the school of hard knocks. It is all about how to accept failure in startups (I am confident this young man will continue to learn: He is a fast learner with a bright future ahead of him and his startup). 

He called on Monday to say the money had arrived in the startup’s account, transferred as agreed from the very cooperative VC by the very cooperative bank (Silicon Valley Bank). He sighed with relief and then said he had to hang up to start working on delivering the due diligence material required to close on the current round of VC funding (another high pile of legal documents).

So what can you learn from this rush episode? Try these:

• Plan on every task taking X2 the days you think it should. Entrepreneurs are always overly optimistic.
• Respect the complexities of legal and banking matters. Centuries of legal and financial work has led to mountains of documents required for even small sounding tasks (like opening a bank account). Drug smuggling and terrorism have added hurdles.
• Chief Financial and Administrative Officers are very valuable to startups. They know how to get the most done the fastest with the least cost.
• Pick VCs and bankers for their attitude. They all have money. You’ll have to live with them for half a decade or more after you get their cash. Chose individuals you think will go the extra mile when you need it (without putting you through hell). 

BOTTOM LINE: “Haste makes waste” is the old proverb. Speed is part of startups. They have a high sense of competitive urgency. Too much of anything is bad, including speed. Learning to respect the time required by legal and financial projects is part of your education. When grasp all of that, you’ll have what it takes to negotiate better deals, as well as reduce the cost of time and mental anguish when doing important events. And you’ll miss less payrolls. They you’ll become a veteran of a startup. People will respect you even more than they already do. Your experience will add to your unfair advantage.

Comments

[John Nesheim]

Joe, you are right: There are some businesses that should never take VC money. And some that should take it only when they are in a favorable negotiating position to do so. And of course there are those companies that need $5 and $10 million seed rounds to just get started. Time is the great enemy (because someone out there is already working on your idea). Wisdom in managing time to market has huge rewards.

[Joe]

The lesson learned here is to grow organically, not take VC funding, not to have more employees than your cashflow can support.

Just how hard a line can this companies founders now take with VCs that gave them a bridge loan? They've been put over a barrel, and the terms will not be favorable at all.

The real trap here is in thinking that you need VC funding - especially in this day and age, where monetizing your service is cheap, hosting your service is an on-demand rather than capital intensive proposition, and if you have to hire developers, they can be outsourced (though you really shouldn't need to anyway.)

Maybe this company is doing medical research or manufacturing a product... but if they're a web 2.0 company, they made their mistake many months ago... and they have cost themselves uncountable opportunity by focusing on closing investment rather than closing sales.