The “cash out” date for a startup, ie. the date when the startup runs out of money, is analogous driving a car towards a brick wall. Hopefully your brick wall doesn’t arrive gift wrapped with a bow on Christmas morning. What I’m talking about it the timing around your cash out date. Similar to other areas of life, timing is everything.
A few months after you close your round of financing, your VC will ask for your cash out date. This is not a bad thing, the VC gave you the money to grow the business and they expect you to spend it. Unfortunately, as entrepreneurs we tend to think in 3 months increments, and the cash out date seems like a decade from now. But you do as you’re told and run the numbers based on the real sales data you’ve accrued over the past couple of months…. and it turns out that you run out of cash end of January. This is possibly the worst possible time to be out of cash, too bad you didn’t see that one coming. Brick wall straight ahead.
Ideally your startup should target August 1st as your “out of cash” date. Here are a few reasons why:
- You want to give yourself 6 uninterrupted months to raise your next round. Over the course of this time period you will need to meet with the same VC several times. Good VCs invest in a positively sloping line, so don’t expect to go to Silicon Valley and make it rain in the first meeting.
- Access to capital means you need to access VCs. VC are hard to reach from the beginning of August to the end of burning man (at least the ones in SF) and anytime after thanksgiving. It also takes a few weeks for the office to return to normal after the holidays, so don’t expect to schedule meetings on January 2nd.
- An August 1st cash out gives you the right pacing. You start with the first, low pressure, meetings in January. A few months later you touch base again with the VCs who showed interest. You get a term sheet at the end of May and have several weeks to close before you crash into the brick wall.
- Oops, your projections were off? You actually run out of money at the end of June. Good thing you have a buffer and started early.
- If your cash runs a little longer late July is actually a good time to close. People seem to be motivated to tie up lose ends before they go on a two week vacation
As an entrepreneur I understand that the timing doesn’t always work out. Sometimes you aren’t able to raise extra money to extend the runway for those few months, and that’s okay. All I’m saying is to take a look at your financial model prior to closing your round and see where the cash gets you. Ideally it’s to August 1st.