November 24th, 2021 | By: Wil Schroter
What happens to funded startups that can't raise any more funding?
We enter the funding "No Man's Land" where startups go to linger and eventually die a very long, unceremonious death. No one talks about it — certainly not the Founders who are left with the breathing corpse that was their once-hot startup. Certainly not the investors who have written off their investment long before anyone else.
Yet everyone knows we're digesting in the Sarlacc pit for a thousand years without any idea what to do about it.
Having been in this fiery wasteland more times than I care to admit, I learned that at some point Founders have pretty much three options to escape, and "we'll just hold out for funding" isn't one of them.
Let's start with perhaps the most interesting option — buying it back for ourselves. We spent a small fortune to build this engine in hopes that it would become the market-dominating behemoth of the future. But instead, it just became a Baby Yoda.
But here's the thing — while we might need a behemoth to create investor returns, the current state of the business, especially if we were to pare it down a bit, might be a fantastic opportunity for our own benefit.
This is where doing a recapitalization of our startups comes into play. Our investors will soon learn that it's worth nothing once we abandon it (it happens) so it's our job to encourage them to hand the equity back over to us with some sort of long-term incentive for them to do so. By way of that, we buy it back and make it awesome for ourselves.
By the time a startup has entered the "No Man's Land," there's no version where it's going to get a big return. The only people that don't know are the Founders and some of the investors. There's always this fantasy that some "dumb buyer" is going to recognize all of the value and somehow pay us a handsome sum. Dumb buyers aren't buying our clearance rack startups — smart ones are.
The smart ones are going to look for an insane type of deal that they can leverage to go build something bigger or better. They don't need to pay a huge premium because they are the ones with money and there are tons of other startups that are in the same boat that they can negotiate with. We have no leverage — they do.
The only way we make this work is to admit we're in a fire sale situation, even if we try to negotiate otherwise. The worst thing that can happen is for the investors to pretend there's "tons of value here" while leaving the poor bastard Founder trying to schlep this rusted carcass all around town. It's just sad.
When the last two options don't work, and frankly they rarely do, it's time for the Founders to just cut bait and run. Just a friendly reminder my fellow Founders — you can, and should just walk away. No one will care if you drive yourself insane and penniless trying to ride this thing to the bottom of the ocean. When you look at the ocean floor, trust me, you're going to be the only one down there.
Startups are generally either growing or dying — there's rarely an in-between stage. Therefore when we're willing to admit it's game over, we simply have to get out of this as soon as possible so that we can move on to something — anything — more productive. If we don't, it's at our own peril.
The worst thing we can do with all three options is to take no action at all. If we sit around waiting for that one investor to maybe call us back, or we pretend that our existing investors will take pity and pour money into us, we're fooling ourselves. We need to look at all three options, make our bet, and run with it.
There's no money to be made in the No Man's Land.
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Wil Schroter is the Founder + CEO @ Startups.com, a startup platform that includes Bizplan, Clarity, Fundable, Launchrock, and Zirtual. He started his first company at age 19 which grew to over $700 million in billings within 5 years (despite his involvement). After that he launched 8 more companies, the last 3 venture backed, to refine his learning of what not to do. He's a seasoned expert at starting companies and a total amateur at everything else.