Getting follow-on funding… after failing to achieve sales

August 25th, 2011 → 10:44 pm @ // No Comments

Several of the companies I’ve invested in have missed their sales targets and are chasing follow-on funding right now.  The Boards have different problems and different approaches to their situation:

Company A has failed to get its product sold in the market, and lost the confidence of some investors.  The Board still believes in the business’s future, and has explained to shareholders that they have a new strategy for entering the market.  Still, the shares are being offered at a heavily discounted price, reflecting the company’s failure to date.

Company B also got into trouble in the market.  In their case, some poor management, compounded by a large European partner going bankrupt left them out of cash and without a significant sale.  The Board hesitated to ask investors for more money to back a relaunch.  Instead, directors worked for many months to find a new way to leverage the company’s intellectual property… and removed the managers. They now have a new story for investors but have had to heavily discount the shares for the new round.

Company C lost both of the two main market opportunities they were chasing.  In each case the deals were lost at the end of a long sales cycle.  But, unlike Companies A and B, Company C had continued to develop an impressive sales pipeline, lodged extra patents, built a strong team, and achieved a surprisingly good brand position (for a startup with no sales!).

While Companies A and B are begging investors for more money, Company C is able to say, “Well, we missed our sales goal (and are hence out of cash), but look how strongly positioned we are!” Company C is delayed, but still on track, and investors will still be asked to fund at the rate of the previous round.

I have watched all three companies closely for a couple of years.  The Boards of Companies A and B were mostly ‘investor representatives’ who allowed their CEOs a pretty free hand in running the business, and only stepped in when the situation had become dire.  Now they are working hard to turn the companies around.  The founder of Company C, however, had assembled a Board dominated by industry players with both governance experience and a passion for the business.  He had then willingly accepted their guidance. The CEO had chased his main opportunities as zealously as had the CEOs of Companies A and B but, even though Company C also ran out of cash, the Board were well in control  and  had ensured that the fundamentals of the business were strong.

I’ll probably continue to back all three companies.  But, if I had to choose one, I’d put my money into Company C.  The Board have proven that they can prepare the company to handle the delays and sales failures which most start-ups experience, and that gives me a lot of confidence.

The directors of the other companies are all skilled, experienced investors, but they were not previously as closely engaged  as they needed to be.  So why will I back the companies again?… Well, I think their Boards are now VERY focused on governing the businesses as closely as start-ups need to be governed.  Running out of money really focuses the mind!

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