Your startup can’t raise more money. Here’s what it should do instead.

If you raised in 2020-2022 and aren’t at break even, here are the options your management team better be considering.

👋 Hi, it’s Greg and Taylor. Welcome to our newsletter on how to make high-stakes professional and personal decisions in your 3

I frequently talk to founders and startup execs whose company last raised money between 2020 and 2022 (the last VC gold rush, prior to the current AI gold rush). They’re not profitable and they’ve got about 12-18 months of runway left (sometimes less) – so the clock is running out on their startup.

A few years ago, they would have followed a simple playbook: raise more capital. But that’s not possible anymore. Funding has dried up for everything except AI – and it’s starting to happen in AI too. 

If you work for a startup, this is the reality that your CEO and management team are grappling with. They can’t raise more money, so they’re looking at five other options: sell the company, pivot the company, get to break even, re-cap, or quit. 

If you’re not the CEO, you might not be able to influence which path you take. But knowing what the options are (and, ideally, which your company is pursuing) will make you a smarter leader and employee. You’ll be able to do work that ladders up to your company’s ACTUAL goal – not a fairytale version of startup success that doesn’t exist anymore. 

Greg

The 5 options your management team needs to be considering 

Quick reminder: If your company raised money from VCs, the stock they bought is “preferred” (aka “the preference”). It gets paid back to investors first in the case of a sale – aka, before the team sees any money. 

1. Sell the company. If a sale is happening this year (bad timing) then it’s probably a distressed sale. In other words, selling the company for not much – either all stock in another private company (usually the worst offer), or a cash sale that covers some portion of the preference and so goes 100% to investors. If you raised $100M and you’re at $5M in annual revenue, a sale at $25M (5 times revenue) means that investors will get all of that $25M.

A distressed sale happens for two reasons. One, the fundamentals of the business don’t work, and the founders/board can’t see a path to break-even or any of the other options below. It’s peace with honor. 

Or two, the founders and/or board have run out of patience. They see a path forward, but it’s going to be really hard, and they’re tired or seeing better opportunities elsewhere. The most recent, high-profile version of this was Microsoft’s purchase of Inflection AI’s model and employees (a fancy way to frame an acqui-hire). In that case, investors did OK – but it was not the fairytale ending that anyone wanted 12 months prior.

2. Give back the money. If you have substantial capital in the bank (say $10M or more), some investors might call and ask for this money back. Or the CEO could call investors and offer, because they feel they can’t in good conscience keep burning that capital without seeing a way to create enterprise value.  

Last year, investors like Tiger and Coatue offered some portfolio CEOs deals with something like 2 years of severance for the founders to get their capital back. Overall this is less common, but can be a cleaner break if there’s no path to break-even, the company can’t be sold, and the current business won’t create more enterprise value with more time. But if the capital left is insignificant when compared to the size of the venture fund, the VCs will prefer for the entrepreneurs to just keep trying.

3. Pivot. In this case, you have some capital left and your management team sees a new opportunity, likely adjacent to your current business (but not always — see Slack). The CEO can re-energize investors and the team with this new opportunity, using the same capital (what we’re doing at Section – pivoting to focus on AI).

If your CEO and management team have started shifting resources, energy, and All Hands comments toward one of your existing products, or a new product or market opportunity entirely, this is likely what’s happening. 

Pivoting can be a good option if your management team sees a truly promising opportunity – but it also takes years off your life (Greg’s done it 3 times prior to Section). Your management team will need to be honest with themselves about whether the new opportunity is real, or just a hail mary to keep the lights on. In the end, the odds of a successful pivot are just as low as a successful startup – sometimes it’s just better to call it quits, close or sell what you have today, take a vacation, and figure out a new business to start. 

4. Get to break-even. In this case, the management team sees a way to get to break-even before they run out of capital. The CEO is probably telling the board, “I’ll run this company break-even for the next 3 years if you compensate me enough, and then we can sell it in better times.” 

Getting to break-even is a better option than a distressed sale, but remember – even if you get to break-even, the company cap table does not go away. Investors are still betting on you for a return, so at some point you will probably have to find more growth, better margins, or both. Companies have done this – ON24 ran for 20 years before going public – but it’s a long, hard road. And if you can’t get to profitability, you’ll have to pursue one of the other options eventually anyway.

5. Recap. Recapitalization (“recap”) usually happens when you have an opportunity for new capital (e.g., your pivot is working), but the new investors won’t invest at your current valuation. Instead, they reset the valuation lower and significantly dilute the earlier investors – or allow existing investors to participate in the new round. 

In other words, you get new capital / new investors / new runway at the expense of your old investors. Your old investors will go for this if the other options don’t look great, and they think they could still make some money on their reduced ownership in the recapped company. Or, frankly, because they’re tired, busy, and don’t care too much about one loss in a large portfolio.  

Our advice

Like we said, you may not be able to influence your startup’s path – but knowing the options (and ideally your CEO’s mindset) can help you do work that supports the company’s actual goal. 

If you’re trying to pivot, you can focus your energy on the new product/service; if you’re trying to break even, you can help by conserving capital. At the end of the day, you don’t want to be focused on building a $100 million business when your CEO is focused on making a quick sale and getting out soon. 

If you’re a department leader, you should sit down with your CEO or manager and have a frank conversation about the path they see for the business. They may not have a perfect (or single) answer for you, but they can give you a sense of their mindset. Do they care about getting a win / are they deeply committed to the problem you’re solving? Or are they burned out and ready to do something new? This is an art, not a science – highly dependent on the motivations and outlook of individuals at any given time.

Bottom line: Don’t expect a new funding announcement to bail your company out. Those days are over. BUT you should still expect your CEO / management team to have a plan, and to share those thoughts with you if you ask. 

Ask the right questions, and don’t expect fairytale answers. 

To the next 10 years,

Greg & Taylor

P.S. If you’re a founder or CEO and need to figure out which option is the right next move, email us and schedule some time to chat with Greg. Maybe he can help.