January 4, 2011
A few voices on the web have recently called for a less glamourous presentation of start-up life. Mention the failures, be candid about the problems – they say. Personally, I found my entrepreneurial ride stressful enough without dwelling on the problems but I guess the goal is to give budding entrepreneurs a realistic perspective. So here is my own 2011 retrospective (or at least the first one for 2011). Note that we had plenty of other problems – I am just picking this particular one because it makes for a nice story.
With that out of the way, let’s set the stage for our tale. Our start-up is developing display technology based on $40k prototypes (cost, not price). It would take years before the technology reached your living room at a consumer cost point. We didn’t use the jargon back then but we “pivoted” our business model from manufacturing of research devices to medical displays and (later) post-production displays, to the development of video eco system technologies, and finally to display/video technology licensing. Our project rests on the shoulders of some 20-30 engineers and even that massively underresources the opportunity. In short, while we are a “Lean Start-up” in the sense of iterating towards a viable product through market feedback, we clearly aren’t a “lean start-up” in terms of expenses, timeline or organisational footprint.
Add a shoe-string funding strategy and you get a very scary mix. In fact, to this day I consider it a small miracle that our financials never dipped into the red. The graph below is a summary of our cash situation until our acquisition in early 2007. Blue bars are cash in hand at the end of the month, grey is burn rate of that month. The red line is the scary part. It shows, on the right-hand axis, the number of months before the company goes bankrupt with those cash reserves and burn rate. As you can see, we spent almost the entire life of the company with less than a quarter of runway and some of it really limping from month to month. There is a little bit of revenue mixed into the numbers but apart from some prototypes sales at cost, only one of the spikes is driven by a substantial joint development payment (about $1M in total revenue). There is also about $2M in government money spread across those years (SRED, IRAP and some minor programs). Oh, and the last spike is actually a bridge loan from our acquirer (extremely honourably not used by them to screw us!).
None of this money was in any shape or form “stable” income. Prototype product revenue fluctuated wildly, SRED came “sometime later in the year”, and extracting joint development payments was like pulling King Kong’s nose hairs. The only thing “stable” were the monthly paychecks to all those engineers. Keep in mind that with one month of runway you are basically already bankrupt due to severance obligations.
If this still sounds “glamourous”, then add another layer of context: throughout this entire period I am a graduate student with my degree completely wrapped around the activities of the company. For the early period I am sharing a room in a house with a group of artists (the only income class lower than even students). My housing improves when my salary switches from equity to dollars but now my wife is in a difficult pregnancy for the last entire 9 months of this graph (our son is born within hours of the acquisition deal signature). Exciting? Definitely. Fun? Mostly. Rewarding? Because it worked! But glamourous? Absolutely not. It’s only the blessed fog of nostalgia that gently softens the scary memories.
So how did we survive this rollercoaster and what did I learn from it?
- Surround yourself with great people. If there is one lesson at the forefront of all that I have learned in my career then this is it. We had a strong management team, great mentors on the (advisory and corporate) boards, and excellent engineers. I am sure that we weren’t the best in the world in every area (individually or as a group), but everybody had faith in the venture and a great willingness to do whatever was needed to move forward. Between our board, advisors, investors and tireless management team, we somehow always found yet another source of money when things became tight (I remember our confused Controller trying to track a mystery wire transfer only to later discover that one of our investors/advisors had mentioned us to a friend, who had simply wired us money).
- Raising money is a function, not a side activity. I must have been involved in over a hundred formal investment pitches and countless more informal ones. Sometimes alone but usually we would prowl in pairs (which I highly recommend). Everybody on our team had a different style, but I learned pretty quickly that fund raising is just as much a functional skill as software development or product marketing. If your start-up plans multiple investment rounds then I would strongly recommend that you staff accordingly. Fund raising cannot just be something that you do “on the side” – you will either run out of cash or get screwed so badly by savvy financial operators that you wish you had run out of cash. In our case we had some exeptional money raisers from whom I learned a great deal (though nowhere near enough: our CFO gathered a substantial angel investment from a stranger at a bar while I still have a hard time getting somebody to buy me a soda…).
- Fund raising is a continuous process, even if you actually do it in tranches. I think there is a common misconception that fund raising is something you start when the need the money and then stop when you get it (until you need it again). At least in our case this never really worked. Of course our gaps were never big enough to be complacent, but the bigger issue here is that fund raising is basically the only “outside” metric of progress for a pre-revenue start-up. Fund raising forces you to achieve milestones and make meaningful progress towards your end goal. Otherwise you either don’t get any money when you actually need it or get hit by down-round valuations. The fact that we were nearly constantly scouting for additional investment meant that we were also constantly pushing hard for advancement. It pushed the team to the limit and certainly added some dog’n’pony show pressure, but ultimately built the best value for everybody involved.
- Be prepared to be lucky. You ultimately cannot control all the variables in your venture or fund raising process. Instead, you need to create a foundation where bad luck won’t kill you and good fortune can be leveraged. In the fund raising game this means to always have a backup plan if the “sure thing” investment doesn’t materialize and at the same time keep in open eye for opportunities out of left field.
BrightSide was a phenomenal ride with a happy ending. We managed to built and sell a common-share-only venture with nearly optimal dilution (in the sense of not a dime gone to “waste” at the end and constantly rising valuations between each of the 7 rounds). But I would strongly encourage you to seek other careers if you are looking for glamour, stardom and easy riches (Wall Street is hiring again…).