The Mistake Every Founder Nearly Makes
We have very few “rules” we impose upon our founders, but one we do emphasize from the beginning of our relationship is the DROC Rule: “Don’t Run Out of Cash!” We give every founder a t-shirt with this maxim:
When we enter into a partnership and we give a founding team money, we want the team to feel that they are just getting out of the starting blocks. It’s important to know they have lots to prove and need to start working hard toward the milestones on the horizon, not that they have crossed the finish line because they are now funded!
It is a mindset that is important: if a founding team believes they have ‘won’ because money is now in their hands, we’ll have a problem down the line, especially when cash gets tight.
Cash in the door should not necessarily equate to a founding team bumping up their salaries or throwing a victory party. We realize cash does get tight if a product release comes late, the sales channel is longer than expected, or customer adoption is slower than expected. We work through these issues and have tough conversations with our founding teams about burn, reducing expenses, cutting salaries, or holding off on travel. We work together to help create and manage their budget and their cash position. When we forecast a cash deficit, we work with the team about how to increase revenues and how to start the next round of fundraising, months in advance.
Cash always seems to run out sooner than you expect and it always takes longer than you want to fundraise. Keeping from breaking the DROC rule takes executing on a well laid out plan, working hard to achieve results, fundraising, and sacrificing when times get tight. DROC: it’s fatal if broken, but preventable.
Have you experienced this issue in the past? What did you do to prevent it? What lessons were learned?