Money, Money, Money - $$$$
Over the past several years I have worked with many companies on their cash and fundraising strategy. This work has accelerated recently as we experience the third recession I have been through in 20 years.
The dynamic tension here is tough to manage: When should you spend money vs. preserving cash? Most revenue forecasts for younger growth companies are too optimistic. That generally means you are going to need more cash than you think and encourages saving. However, investors prefer companies that are growing, have broken through various revenue levels, and have fairly fleshed out products or services. That encourages spending.
So, when do you spend vs. save? The answer is not black and white.
Spend if you are growing, have sales momentum and have decent cash reserves. I have run across several companies recently that have 20+ months of cash reserves. That may be excessive if sales opportunities are strong and not affected by the recession.
Save If you have less than a year of cash in the bank (sometimes far less) and significant work to do to grow a sales pipeline and/or build out product modules or service lines. No matter how much you feel pressed to spend, without adequate cash reserves you must face reality and slow down.
I have a standard checklist of questions I go through when helping companies with their cash strategy. This includes matching current revenues to cash needed for growth to expectations of investors typically investing at that level to eventual exit goals. I just went through this exercise with a rapidly growing client. We decided on a $3 million round focusing spending on personnel and marketing to bridge to a larger growth round next summer. This specific plan was well-received and we successfully secured investment capital.
Today’s tip: 100% of the forecasts by companies seeking their first or second round of funding are presented as “conservative projections”. 100% of the forecasts put together by companies seeking their first or second round of funding are missed due to revenue ramping up slower than expected. When pitching to investors never use the phrase “conservative projections”. They consider it an oxymoron.
Today’s L.M. Boyd moment: Mythmakers of ancient England spoke of a monster in the shape of an emaciated cow called “Chichevache” that ate nothing but faithful wives. The bit of lore eventually lost currency. Some English say it was too silly. Some Irish say the old cow starved to death.