#35 – Start of Season 3 – My Company is in Trouble. What Should I Do?

“I am leading or involved in a company… and we are in trouble. What should I do?” In this episode, the beginning of season 3 of Tech Deciphered, we firstly share how to know when you are in trouble (spoiler alert: getting this right is essential) or … if you are “relatively safe”. Navigation: Intro (01:34) Section 1: Context (03:28) Section 2: How to know the company is in trouble (04:58) Section 3: What does “being relatively safe” look like? (17:15) Conclusion (28:17) Our co-hosts: Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmitt Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro Our show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Intro (01:34) Nuno G. Pedro Welcome to season three of Tech Deciphered. We have many surprises in store for the season. But to start, we will have two episodes: Episode 35 and 36, on the topic of My Company is in Trouble. What should I do? In these two episodes, we will discuss context on what is happening currently in the market. But more importantly, we'll help you figure out if your company is in trouble or not, maybe the most important of the first questions that you should answer. Secondly, we will talk about what to do if your company is indeed in trouble. And coming from different perspective, not just the perspective of the CEO, but also of people that are involved at the board level or relatively senior people that are involved in the future of the company. And finally, we come to the "what if all fails" piece, right? If everything's failed, what should I do? It's going to be an interesting set of questions, and hopefully, our answers will be helpful to you all. Section 1 - Context Bertrand Schmitt Thank you, Nuno. Yeah, it would be exciting to start this Episode 35. Maybe to share more context, we can start first with our last two episodes about the bubble bursting, winter coming. I guess winter is getting closer. A lot of great companies, tech companies today, they are valued at 50% of what they were worth last year. Fifty percent, five-zero. And it's not just 50%; it's 50% versus a year ago. Imagine the company attempt to grow, to expand their business, to be more successful, but the market are still valuing it 50% lower. That's happening for a lot of great companies in tech. If I take some private market, this company in the buy-now-pay-later space that announced pretty recently, [inaudible 00:01:42], that they were moving from $46 billion valuation last year to 6 billion market cap this year for the last round of financing, which is a huge gap. We're not talking about 50% anymore. We are talking about 90%. It probably happened because they had to mirror what happened in the public market with other competitors in that space who end up being in a similar situation of losing 90% market cap. Of course, the private market had to react and adjust to that new situation, and you cannot keep disconnecting yourself from the relatives of public markets, especially if you are at very late stage. Nuno G. Pedro You have Zoom that was close to 160 billion at the top of it in 2020. Top of COVID, I guess, and now at 25 billion or so. There's been some interesting... And this is a public company. Bertrand Schmitt We are not talking about Peloton. Nuno G. Pedro We're not talking about Peloton. The whole COVID effect also being felt very strongly in many industries. Bertrand Schmitt Yes, Peloton is actually on 15X. Nuno G. Pedro That's not too bad. Bertrand Schmitt It's in way more serious financial trouble than some of these companies we are talking about. Nuno G. Pedro Today, we will talk about a variety of situations. This question has been asked to us by some of our listeners, which is, okay, now some companies are in actual trouble, and we always have to qualify what does that mean? What does actual trouble mean? A company like Zoom that is worth significantly less than they were during COVID height, I mean, it's troublesome for Eric and for the leadership team, but honestly, there was a readjustment of their value, and probably now they're undervalued. Section 2 - How to know the company is in trouble? Nuno G. Pedro It doesn't mean that Zoom is not a valuable company. If we look at some of readjustments that we saw around companies like Facebook and Amazon and others, these are not companies that are in trouble. They have had readjustments and reset things. These two episodes will focus a little bit more on actual trouble. Not just valuation trouble but actual trouble. Like what means, may I run out of cash? Do I have a growing business or a growing concern going forward? Maybe let's start by setting that stage. How do you actually know that your company's in trouble? Where do you start? This seems like a really basic question, but it's often the case that people get it absolutely wrong for a long period of time. That long period of time could be six months or a year, where if I'm the CEO of that company, I could have been working already on a plan to readjust my strategy, my operations, my leadership team, whatever needs to be done to shift the boat into the right direction. And I just missed it. If there's anything you want to take away from these two episodes, I would say the first thing to take away is figure out whether your company's in trouble or not relatively quickly. Listen to your advisors. Listen to your board of directors. Figure out if your actual economics are working or not. Let's start with the first thing you can take a look at. Many people in the startup world understand this, but we're going to explain it in a little bit more detail. Understand your runway. What a runway means is how many months do you have ahead of you with a specific set of assumptions—we'll discuss that in a second as well—that you can go without running out of cash. There are many companies that are just fundamentally profitable. They don't have a concern around that, their unit economic scale, etc., but in any case, many companies are not in that camp. There's a lot of startups that are burning more cash—we'll talk about burn in a second— are burning more cash than they're generating. Therefore, their runway is necessarily limited. It could be 6 months; it could be 12 months; it could be 24 months; it could be something else. What would they have to do? Just to start this discussion, a runway calculation is actually not that easy because it starts from the perspective of assumptions. In assumptions, you need to think through a variety of things. The first thing you need to think through in your runway calculations is, honestly, if I'm being extremely conservative in terms of my top-line growth, my sales pipeline, but also pretty aggressive in the fact that I might have costs that I'm not fully anticipating. When I do this analysis and I turn it into a cash flow analysis, that will give me probably a very aggressive runway. It'd probably shorten my runway more than I would expect it to do so. That's a good thing because that will tell me when do I need more cash infusion, or do I need to do something else about it? Again, if you are in a case today, and we'll talk about, later on, what is a classic runway. I think in the industry, we talk about 12- to 18-month runways once you raise money. We'll discuss later that actually, maybe you should extend your runway above the 12- to 18-month period of time, which is classic in fundraising. So I raise so that I can maintain my business going for 12-18 months. We will talk about it later that we believe that you should actually prolong it. It should be more than 12-18 months. But if I have three months left of runway, we're running out of cash in three months, and I'm not raising money yet, I'm going to have a problem because raising money takes time—takes 3-6 months; we've talked about this in the past—and so, how can I do it? How can I go to that level of maintaining my company growing or going either with financing or with something else? So I know I'm in trouble if my runway is really, really short, and I have no other way of changing course, or if I need to change course, but I need to change it right now. So first thing to look at, runway. What's your runway? How many months you have left of cash? Do different scenarios. If you think your scenario is conservative, it's probably not conservative enough. Second thing to take a look at is burn. Bertrand, what is burn? Bertrand Schmitt Yes. Maybe before going what is burn, I think it's very important that the proper scenario is put in place to estimate runway calculation because if you start always using a rosy scenarios that you are going to grow, as expected, nothing more is happening in that market, in that situation, things are going to change; expectations might not be met, and you cannot plan a runway calculation just based on a rosy scenario. You might want to have a downside. You might want to have unexpected, maybe an upside scenario, but you cannot just plan everything on an upside scenario, an optimistic scenario. To go back to your question, what is burn, burn is simply how much money you are burning every month, so you are losing every month. We are talking typically about cash burn. To be clear, that means that if you are burning, let's say, one million a month, and you have 10 million in the bank today, and in 10 months from now, you would be out of cash and the runway is 10 months. That's a very critical metric. Obviously, this one as well would vary depending on your scenario and the assumptions. Nuno G. Pedro ...