The Number One Risk Facing Early-Stage Startups

On the first of every month, I write a short note to the founders I get to work with. The most recent note contained a more sober bullet point. I didn’t intend to focus on this topic, but it’s been coming up more and more in conversation, so in the spirit of hoping the information spreads more broadly, I’m copying and pasting that bullet point below, verbatim:

“Company Risk: The single greatest risk for an early stage company is to run out of money. That can happen because there’s no business model or revenue, or because the next stage of financing wasn’t prepared for. I will sound like a broken record to some of you, but this is a REAL RISK. It’s dangerous. I view my job #1 is to help everyone avoid this risk. There have already been a few cases where the company runway is very short. In such a situation, please please please tell me. I’m here to help. It’s not easy stuff to go through, but I’m doing this whole fund to be helpful and learn. I only invest a small amount, so most of you (I hope) brought me in for something other than money.”

This is nothing new nor is it rocket science. And, of course, not everyone will make it despite valiant efforts.

But, don’t take it from me. Look how Fred Wilson laid out the three key jobs for a startup CEO — one of which is to make sure there’s always enough cash in the bank. Or. look back to December 2011, on Chris Dixon’s blog, where he outlines this situation (and potential trap) very clearly. Even though this is all common knowledge and written in countless blog posts, it seems as if lots of people are just taking future financings for granted. Nothing could be further from the truth. These risks are very real, and they sneak up even on many founders. And, especially if a young startup has taken angel and seed funding from a party round of individuals and/or small funds for small amounts, even the investors can find out about a bad cash situation on the very last day. Unnecessarily running out of money is a real, existential risk, like falling asleep at the wheel — one that should be taken seriously and repeated often for the benefit of the overall community of founders.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus