6 Mistakes Founders Make When Raising Funds

Raising money for your startup doesn’t have to be an impenetrable mystery, like whether your fridge light stays on when you shut the door. Every week, I meet people who still haven’t figured it out. In this article, I’ve shared some common mistakes I stop people from making.

The fridge light turns off. Next topic, fundraising.

  1. Too little, too late: In an earlier article, I mentioned that startups should raise more money than they need, or else risk becoming a #BurnRateZombie. We are part of a volatile ecosystem. It’s good to be prepared, especially when you’re starting out.

What most entrepreneurs also seem to forget is that raising funds takes time.

Even if you strike a deal, it could be months before the money is transferred into your account. Don’t ever stop raising funds. Continue to network and interact with the right people, even if you don’t need the money right away.

Most importantly, be mindful of your burn rate and runway. It’s easy to get so consumed in growing the business that you lose track of critical financial numbers. Watch your runway like a hawk so you can have your investor outreach strategy ready when you need it.

2. Too much, too soon: When it comes to fundraising, too often, people focus on the how, and not enough on the ‘how much’ and ‘when’.

We’ve heard horror stories of promising companies that get massive funding early in their life cycle only to die a quick and humiliating death. Color started off as a photo-sharing app that raised a whopping $41 million in 2011. This was before it had added a single user.

What happened?

It shut down months later in September 2012. The team was acqui-hired by Apple, but there was so much negative publicity around the app that Apple never even bothered with an announcement! Experts proclaimed that the product did not resonate with the customers. In other words, a bad product-market fit.

FYI, Instagram had raised a $500,000 seed round.

3. Selling yourself too low: Another drawback of raising too much too early in is the high probability of a low valuation. You’ve given away some equity as well, which would mean you no longer have complete control over your new business. You now have a lot of money, an iffy product, no real proof of concept, and someone you are answerable to. How would that work for you?

Remember this: A startup operates in two phases — the build stage and the growth stage. Funds fuel growth.

During the build stage, it’s important to stay lean, and not be controlled by VC money because it can often complicate things.

The problem is, when entrepreneurs raise millions, there’s pressure on them to spend it. VCs did not give them the money to accrue the savings interest. However, until the founders fully understand the market and how their solution fits into it, they can’t spend it in the right direction.

4. More money, more mistakes: When you have limited resources, you are forced to look deeper and make tough choices. It pushes you to negotiate harder on your office lease, or perhaps take a more frugal space. It teaches you how to stretch a dime to a dollar, and make each dollar work for you the right way. It will force you to keep salaries palatable in an inflated market, and will constantly push you to take decisions that bring you closer to your revenue model. These are hard decisions, and these hard decisions make for a solid foundation.

5. Don’t spray and pray: Don’t make the mistake of reaching out to every investor you’ve heard of. Do your homework. I’ve heard of startups at seed stage pitch to investors who don’t invest in companies that size or in that industry, only to be disappointed in the end. Save yourself the heartbreak and look for funding in the right places. Know your audience and speak their language. Are you trying to pitch a food delivery service to Mark Cuban? Chances are he will decline.

6. Consult an expert: Talk about being penny-wise and pound foolish. Some entrepreneurs decide not to get legal and financial help when signing term sheets to save a few thousands. How does that end? With a raw deal that could cost you a lot more than what you were trying to save.

Understanding the right valuation, pre- and post-money, in case of multiple funding rounds and what terms are actually good for your company requires specialized knowledge. Even before you speak to an investor, work with a good financial advisor to help understand what you need and deep dive into the numbers.

Got a question? Leave a comment.

8 Pieces of Advice for When Your Startup is Low on Cash

Originally published on Startups.co


In June 2013, I met the CEO of a data analytics startup here in the Bay Area. They had raised many millions already and I was on a mission to pitch them our services. However, as I stepped into their foyer, I was already filled with questions.

This was a handsome office for a company that had just raised a Series A round. Rather outsized, like a gangly teenager wearing his father’s jacket. Looked nice, but why does a small startup need a 5X office in one of the priciest real estate areas?

His answer caught me off guard. “I don’t ever want to feel cramped again!” he said, squishing his shoulders together.

Not far from this office, not so long ago, Steve Jobs had made a speech about “Stay Hungry, Stay Foolish”, and here was a company that got him exactly half-right.

I’ll let you determine which half.

This guy actually committed ~50% of the funds raised to the lease he signed for his “non-cramped” office. We never ended up working with this company, and needless to say, they ended at the auction block soon after.

Startup shows and the media flaunt the flamboyant lifestyles of entrepreneurs, and once the VC money hits the bank, this temptation is difficult to resist for even the saner ones out there.

If not personal extravagance, a lot of companies go on a wild hiring spree, or gleefully hand out big contracts to marketing agencies.

Founders often claim this defense: “But the money is raised to be spent!”

Of course it is. VCs did not invest in a Savings account. However, it’s important to figure out a scalable and sustainable business model first, before going out all guns blazing to promote a half-baked business with no product-market fit.

Mohit Bhatnagar, the Managing Director of Sequoia, agrees:

“In the new regime, startups are shunning previously popular buzz-phrases such as ‘growth over profit’ and ‘winner take all’ and adopting new ones instead — getting ‘unit economics’ right and reducing the ‘cash burn rate’.”

In an earlier article, I talked about watching the red flags that signal a #BurnRateZombie. Let’s now talk about how to avoid becoming one. Here’s how to rein in your spend:

1. Audit Subscriptions and Online Services:

I was going through the bank statements of one of my clients when I noticed that their AWS bill for the month was almost a $100,000. This was about 10X their usual bill and curious, I rang the CEO. He had no idea; he’d never even read the bill. After some legwork, we found out that every click on the website was spawning a new instance on AWS, and when we argued with the vendor, we ended up saving them $20,000.

Seriously though: read your bills. Especially for the online services you and your team has subscribed to. You need to make sure your licenses are only for the services you regularly use. Sometimes different employees authorize services to bill your card and then they leave the company, letting the billing continue for months or even years. There should be at least a quarterly audit checking the justification for each subscription, and an automated system to stop existing subscriptions when the person using them quits without bringing in a replacement.

2. Fire your Worst Clients, Not your Best Salespeople:

Don’t cut your best sales guys, instead fire your worst clients. 20% of your clients contribute to 80% of your stress. Focus your energy and effort on the good ones.

Good clients want you to survive. Ask them for an advance or best, a full payment on the bill they owe you.

3. Increase Performance Standards:

Firing your team is not an easy decision to make. Sometimes you might not even be sure whom to cut without affecting performance and team morale. Increasing performance standards might help make this decision easier.

4. Deferred Compensation and Salary Catch-ups for Employees:

If the situation is dire enough that you can’t meet the upcoming salaries of your key people, be honest with them. If they believe in your vision and sense a genuine opportunity, they might go for deferred salaries, freeing up your immediate cash reserves for more crucial expenses.

5. Fixed vs Variable:

Break down your burn into two subparts: fixed and variable. Fixed expenses are one you incur irrespective of the number of customer transactions. For example, salaries, rent, office equipment etc. On the other hand, variable expenses are directly related to your transaction volume. These are more flexible, because your cost moves proportionately with your revenue.

Try to keep fixed expenses at a minimum, and make them as variable as possible. For example, link a percentage of your sales team’s salary to a bonus linked to the business they bring in, or sign a lease agreement that gives you the right to expand your office at the same location, but doesn’t weigh you down if you don’t need the space right now. This will help you control the burn if business dips tomorrow.

6. Message Cuts:

Sometimes your team doesn’t catch up to the fact that you’re running low on money. They’re used to having free beer in the office fridge, Friday-night parties, and a daily gourmet lunch. You might have to get the message across the hard way: tone down the splurging. It might not make a big dent on the bottom line, but all the drops add up to make the ocean.

7. Be shy to commit to expenses that are difficult to reverse once committed.

Like a Vegas wedding that’s quick to get into, but harder to get out of, think of renting or leasing a big ticket item instead of purchasing it. Outsource instead of hiring in-house, to save money on benefits. This way, pulling the plug is also a lot easier if they don’t perform.

8. Quick Burn Vs Slow Burn:

Take the office space on lease, it will still burn your money, but slowly. Buy the same place and kiss that money goodbye forever.

Survival is tough. It is taking a series of decisions that go against consensus, and require continuously maintaining a shoe-string mentality when you have millions in the bank. It’s important to maintain this mentality consistently; cutting back after you’re used to splurging is very difficult. Like an always-broke college student suddenly on the payrolls of a rich company, who finds it impossible to go back to operating on his student budget.

Have you come close to becoming a Burn Rate Zombie? Which of these tips helped you survive? Share your story in the comments below.

Sava360 Interview with Sandeep Shroff, CEO and Co-Founder, myStartUpCFO

Who is Sandeep Shroff?

CEO and co-founder of myStartUpCFO Sandeep Shroff is making a name for himself and his startup… and, as you can see, it’s all in the name! myStartUpCFO essentially provides small businesses with on-demand full-stack CFO support. We all know that in the early stages of starting a business, there is so much focus on growth that sometimes the most critical pieces of business operations and financial controls get lost. That’s exactly why Shroff helped start myStartUpCFO – so small companies can get the much needed CFO office support without sacrificing already limited resources.

Added to its core operational mission is Shroff’s own socially conscious mission to have myStartUpCFO support and empower women and help close the gender gap in the workplace. In their 3+ years of existence, they have worked with hundreds of clients, from unfunded dreams operating out of a garage to companies that generate millions of dollars in monthly revenues. We’re especially happy to have Shroff offer his support for Sava360 and participate in our next exclusive ‘Day in the Life Of’ interview series.

[S360]: What’s your take on some of the biggest tech company PR fails in the news recently (i.e. Uber)? Is this, at least in part, a function of growing too big too fast without the necessary infrastructure in place?

[SS]: I wouldn’t call Uber a fail just yet! But yes, fast growth can kill. More than infrastructure and processes, failure is a result of founders’ / management’s mindsets and attitudes NOT changing. Do your kindergarten learning / functioning skills work in high school or college. Self-induced evolution is hard to do…but it is necessary for any successful entrepreneur.

[S360]: Take us a on quick 30 second high level journey through your career to this point, culminating in the launch of myStartupCFO.

[SS]: I have changed fields of work every ten years or so, but I’ve always included the previous experience to enrich the next. My first ten years were as a hands-on computer programing geek in Silicon Valley startups. The second ten years were analyzing tech companies on Wall Street (which I did not like much!) and working in finance roles in tech companies. The third ten years are a culmination of tech, finance, and previous 20 years of nonprofit work in the women and children’s literacy field in India. myStartUpCFO is a financial services startup providing services to other startups. All this while employing women who are working from home, which allows us to stay nimble as an organization, and also provide a stable, challenging career to women who want a healthier work-life balance.

Read more …

Image Source : http://bit.ly/2ny4Rgk

Are You Smarter Than A Fifth Grader?

After speaking with hundreds of CEOs, I realized that burn rate isn’t as Startup101 as I had thought. There are still a lot of things that founders understand incorrectly when it comes to being a #BurnRateZombie. But before we get into it…

Let’s take a pop quiz!

Once upon a time, there was a CEO running a very promising startup. The company was all set to join the ultra-exclusive Unicorn club. It was valued at $900M, and this is how their cash inflows and outflows looked:

(FYI, Singapore fifth-graders’ are expected to take one minute to answer that.)

Thinking $62M? Well, your math is as good as the fifth graders, but you should know better.

Jason realized after all this burn that he doesn’t have a business model. His company had become a #BurnRateZombie, so he sold all inventory, cut the staff, and finally offloaded the company for a special clearance price of $15M. Jason hems for a living now.

Burn Rate is very complicated. See if you understand this.

Burn rate = Money that comes in — Money that goes out

No, don’t mock. It’s tougher than it looks. In fact, I’ve had this talk with so many founders that I created this burn rate calculator to better illustrate my examples.

You can run your numbers at this link: BURN RATE CALCULATOR

Don’t know what numbers to fill in? You need to talk to us.

Jason wasn’t paying attention to the red flags. But here is what you should be doing:

  1. Sit regularly with your accountant and deep-dive into your numbers (I hope you have an accountant!). Beyond the bean counting (what’s coming in and what’s going out), you should have an overall sense of your financials. One thing about numbers — they don’t lie. Know your top five buckets of expenses and analyze them for patterns. Look out for unexplained numbers and unusual variations in expense lines. Grill your accountant on and make sure she/he knows the stuff.
  2. Ruthlessly track KPIs. Track your Key Performance Indicators and tweak your strategy based on what they are telling you. Do not forget that B2B and B2C businesses track different KPIs. For example, as a SaaS company, do you track your company’s magic number? A lot of disciplined operating KPI tracking goes into this number. But once you have the systems in place, the resulting insight for your business are priceless.
  3. Keep your eyes and ears open. Keep an eye out on the market indicators for funding. For example, if the market is down, raising funds might take longer than what you’d earlier accounted for. If you are not prepared for it, that could be fatal. Don’t die mid-keystroke. Die trying. But above all, avoid dying at all.

“If you can just avoid dying, you get rich. That sounds like a joke, but it’s actually a pretty good description of what happens in a typical startup.” — Paul Graham, Y Combinator

4. Know your burn, track your burn, control your burn. Question the expenses you’re committed to. Just because you have okayed something in the past, doesn’t mean you don’t track it’s ROI. The money you spend on networking events is a classic example of doubtful ROI. Constantly trim the fat.

Survival stories are boring. Who wants to hear about the company that didn’t die? Only our client founders, their investors, and us.

Avoid being a #BurnRateZombie by tracking your burn rate. Make your story boring again.

The best time to talk is now! Call us today.


Burn Rate Zombie

Are You A Burn Rate Zombie?

India’s Taxi Wars will make a great movie one day. The good guys, however, don’t always win.

Sometimes they die before the movie climaxes. Today, the leaders in India’s taxi wars are Uber and Ola. It wasn’t always so. There was another, a more scrappy competitor in the early days.

It’s 2015, Uber had been blocked out of China, and had their eyes on India, the next largest market. There were already many copycat businesses in India that were preparing for Uber’s arrival. The main two were Ola and TaxiForSure.

In anticipation of Uber going full-throttle, both Indian companies started to burn money on subsidized trips and city expansion. TaxiForSure was a well-run upstart. They had a disciplined management team, raised a round of $30M, and had mastered the art of operation and expansion into India’s chaotic market. In three months, they had already expanded to 47 cities. They were subsidizing each trip for approx $3 each and were clocking 8,000 trips a day.

Both the Indian companies needed to raise money fast. Word on the street has it that TaxiForSure considered themselves a better-run company, and was asking for a higher valuation, and so held out longer for the right fundraise. Ola, in the meantime, raised $200M from SoftBank at a valuation of $2.5B. Now they had cash to burn. TaxiForSure was down to four months’ burn but continued to burn money regardless. 

On Jan 12, 2015, Raghu, the founder of TaxiForSure, boarded the flight to San Francisco. He was set to meet 20 VCs on that trip. But as he was flying over the Arctic, his world turned upside down. An Uber driver had raped his passenger in India that night, making Uber Public Enemy #1 in a nation housing one sixth of the world’s population.

Every VC Raghu met had only one question: With the Uber incident, what’s the fate of the unregulated radio taxis in your country? The cloud of uncertainty rained on Raghu’s Sand Hill Road parade. It questioned the ethics and business policies of the heretofore unregulated $7B radio taxi business in India, and no investor wanted to touch this with the proverbial  ten-foot pole right now. With no cash and continuing to burn, he was more than dead. He’d become a burn rate zombie.

Fast forward barely two months Raghu sold all of TaxiForSure to Ola for  $200 M, which was the amount he was hoping to raise, at many times that valuation.

Knowing the importance of fundraising and a manageable burn rate is startup 101, and yet, why do so many founders fail?

‘It will never happen to me’

I have worked with hundreds of founders, and all of them assure me (and themselves!) that ‘it will never happen to me’. Yes, you understand your product, market, and product-market fit. But do you understand all the aspects of your cash burn? What can you control in the short run and what you can’t? Is employee salary a variable cost or a fixed cost?

90%+ of founders will shut down their company eventually. 100% of these closures will be because the company ran out of money.

Just one tip.

You are spending more than you think you are. And fundraising really isn’t going to happen as quickly as you’re planning it would.

What can you do?

In my experience of more than 25 years, I have observed a few bright red flags that warn of the winter to come.

Look out for them in my next post.

Busting Startup Myths: Tracking Financial Metrics is NOT Important

Busting Startup Myths: Tracking Financial Metrics is NOT Important

When I was out on lunch with the CEO of an early-stage SaaS startup, I asked him how his company was doing.

Quite well, I was told. The revenue is growing month on month, we have enough money in the bank, and the employees are happy. Life’s good.

Always a data-oriented guy, I asked him if I could take a look at his books. And when I did, I found out that while on the surface things were going well, a deeper look told an entirely different story.

On the aggregate, the company’s revenue was growing, but month on month, a good chunk of small customers kept canceling the service. The aggregate revenue from these customers was small, which is why their cancellation got lost under revenue increase from a few large customers. Were these cancellations driven by lack of features? Lack of good customer service? Or something else? It is generally a combination and you have to decide where to invest to fix the problem.

Mentally, it’s impossible to track too many pieces of information, and most companies at this stage make these decisions more on gut feeling and less on hard data.

Personally, I have always followed the pithy saying that my an ex-boss would repeat to me weekly:

In God we trust, rest everybody please bring data.

As on-demand CFO service providers, this is the discipline we bring to startups: diligently gathering data and deriving conclusions that will make or break the company at this young stage.

A case in point would be measuring the efficiency of a company’s investment in sales and marketing. An excellent example of this is the “magic number” metric defined by a veteran Silicon Valley investor Rory O’ Driscoll of Scale Venture Partners. A lot of disciplined operating KPI tracking goes into coming up with this number. But once you have the systems in place, the resulting insight for a SaaS company is priceless.

In Rory’s words:

“An investment is made in Q1 in sales and marketing (S&M). The revenue starts going up in the books, usually in the next quarter (Q2). The correct ratio to look at, is not the relationship between S&M expense to revenue, but the ratio of S&M expense in that quarter to the change in revenue for the following quarter.”

Let me simplify it. Take the change in subscription revenue between two quarters, annualize it (multiply by four), and divide the result by the S&M expense for the earlier of the two quarters.

(Quarterly Increase in MRR x 4) / (Sales and Marketing spend of previous quarter)

The idea is that if your magic number is > 1, the company is growing efficiently, and your S&M expense is in the right direction. You can consider increasing it. If it’s <0.5x, the company is still figuring out its model, and you need to take a step back and re-strategize. Anything in between could eventually be successful but in a relatively capital inefficient manner.

This is the magic number that SaaS enterprises often get wrong. And this is one of the many myths we at myStartUpCFO help our CEOs bust. We have done it for dozens of companies, and would be happy to help you. Feel free to reach out through a comment below or directly at sshroff@mystartupcfo.com

There is NOTHING more expensive than a cheap accountant!

There is NOTHING more expensive than a cheap accountant!

There is one thing that I tell every client and employee I work with.

Bad information can kill you.

Think I’m exaggerating? Ask the guys who blindly followed Apple Maps in Australia and landed in death traps – stranded in the middle of nowhere for up to 24 hours.

And when bad information comes from the person handling the finances in your startup, it can and will kill your company. CEOs are often complacent in the confidence that everything is okay because their CFO says so. They’re on a hiring spree, until they wake up one morning and learn that there’s no money to fund the next paycheck of their 400-something employees, and there’s no recourse but to declare bankruptcy. And fire them via email and quietly delete all their social media accounts. (Zirtual, I’m looking at you).

The accountant says your bank balance is $200,000, which is all good, it’s enough runway for a couple months. But he forgot to account for this big AmEx bill that has been building up, or forgot that the San Francisco payroll tax of 1.162% on 2015 payroll is due on Feb 29th.


As a CEO, how do you make sure this situation does not arise? What are the red flags you need to look out for? It’s vital to make sure your accountant is capable and adroit, but while a QA might work with an engineer, how do you test your accountant?

One, make sure you always ask a few detailed questions when you review with your accountant. He tells you your burn rate is $100,000, you grill him for a high level breakup. What part of it is variable? What is fixed? Any change in spending pattern? While these questions will get you some relevant info, but more importantly, they increase your confidence in your accountant and his / her own diligence with numbers before they present the numbers to you.

Two, look out for unexplained numbers and unusual variations in expense lines. If in a 10 person company, your food amounts to $20,000…pause. Analyze.

Make sure your accountant knows the five big buckets that account for 80% or more of your burn.

If you have a budget, compare it with actuals, and analyze the deviations with your accountant. If he stammers and stutters or says “I will get back to you,”, you’ve been warned.

The conclusion is simple: trust but verify, and be careful with your hiring. A cheap accountant can prove very expensive!

If you have any doubts or questions, feel free to reach out to me via LinkedIn or email at sshroff@mystartupcfo.com. I’ll be happy to provide an audit of your books to warn you about any red flags. Our website is www.mystartupcfo.com if you’re interested in knowing more about what we do.

Looking forward to hearing your thoughts.

The (Ir)relevance of Unit Economics

The (Ir)relevance of Unit Economics

How’s your new business coming along? Good? Why do you say that?

Probably because as rational human beings, we intuitively use ratios to measure things. Businesses tend to operate the same way.

You look at your numbers and see that your company is adding 2x new clients every month. Would you think your company is doing well? Your first thought would probably be: yes. But the truth is that while it might look good at first glance, you won’t have the right answer until you look deeper. Your unit economics matter, and if they are adverse, it might just kill your company.

At this stage, what’s more important than the total revenue is your unit economics, which is essentially the revenue and costs associated with each unit you sell.

When you are selling one more thing of what you make – are you making money on it?

In this post, I will be discussing the importance of unit economics, especially for seed-funded companies, both B2B and B2C.

Case Study of a B2C Mobile Gaming Company

Let’s pick up the case study of a B2C mobile gaming company I worked with. A company in that industry will calculate its revenue in the following manner:

It will have X number of Daily Average Users (DAUs), out of which only a few will pay. The company now needs to look at the total money collected over this period.

In this situation, let’s say the company has a total of 1,000 users, and collected $100. So the unit revenue (average revenue per daily average user — ARPDAU) is 10 cents per user per day.

The company, as a service provider, now computes its costs, which are generally divided into two parts: fixed and variable. Variable costs are typically: server cost (partially fixed but some variable), bandwidth, and advertising costs to acquire users.

Assume the advertising cost is $2 per thousand impressions (CPM). On an average, how many impressions does the company pay for before it gets a customer? Let’s assume it to be 1,000 impressions.

Thus, its cost per install (CPI, i.e. the cost of customer acquisition) is $2.

To be profitable to the company, an average user has to last at least 20 days. (20 days * 10 cents / day = $2 revenue) If an average user goes away in LESS than 20 days, the company will never make money.

What happens in B2B?

The situation is completely different in the case of seed-funded B2B companies, because their fundamentals are different. How?

  1. To get any accurate statistical average of a data set, the data set needs to be big (“n” has to be large), and at the seed stage, that is near impossible for a B2B company. At the seed stage, a seed-funded B2B company that has good “traction” will have 4-5 customers, even if that!
  2. A B2B company also has much longer sales cycles – i.e. prospects today become clients next year, which means the costs of acquisition are higher and add up for a longer period of time, for each client. This makes averaging costs over a data set really difficult.

So for B2B entrepreneurs, any unit economics figures derived would have serious validation issues.

Moments like these have made me realize that a lot of startup advice dispensed about is implicitly aimed for consumer startups. While hundreds of people are talking about unit economics for startups, nowhere did I find a distinction between B2B and B2C companies. This is perhaps explained by the sheer volume of consumer startups – AngelList actually shows over four startups tagged “consumer” for every one startup tagged “B2B” or “enterprise.”

However, where unit economics is concerned, I’d like to dispense this myth for B2B startups. Don’t waste precious resources getting those figures right. At this stage, even your investor is more concerned whether you’ve built something that people will pay for. Unit economics gain importance after a Series A round.

If you’d like me to deep-dive into your numbers, I’d be happy to provide a free consultation. Please reach out to me via email at sshroff@mystartupcfo.com or even an inMail works.

Source for cover image here. I have talked more about the “magic number” that startups need to get right in an earlier article here.

Funding Downturn And What It Means For Entrepreneurs

Last night, I was sifting through my inbox, when I noticed a pattern.

Mail 5: CEO of a $1m seed funded company informing me that they’re shutting down shop since neither the Series A nor the bridge loan came through.

Mail 67: Another seed-funded company planning to wrap up operations at the end of the month.

Mail 96: A B2C startup with 1M active users but with no clear path to monetization. Unsuccessful in raising any money. Hoping for an aquihire, but planning for a shutdown.

Mail 128: CEO of a well-funded seed-stage company (high single digit, in millions) had to sell because they’d run out of money. It was an acquihire – so the team stayed intact, the product wasn’t shut down. They consider themselves lucky.

Should entrepreneurs be worried?

According to CB Insights’ annual report, the first quarter of 2016 saw the lowest number of deals worldwide in nearly three years, down by 15% from Q4 2015. Interestingly,  according to another report, Series A deals made up 48% of Q1 transactions, a level not seen in over a year. However, total dollars invested were the lowest since Q3 of 2014 for the U.S.. Even Asian markets have taken a hit, with funding down 32% (in dollars).

Yes, entrepreneurs should be worried.

VCs have less funds available. (No exits lately!) If they have a portfolio of ten companies, they’re analyzing them, and backing the winners, instead of equitably distributing the available funds between all of them. Think of a mother picking favorites when there are five kids to feed, and food only enough for two of them.

What can entrepreneurs do?

Raising funds is going to get even more difficult. Call it a correction or a normalization, the bottom line is that there are going to be more unicorpses than unicorns this year.

Here are some tips for early stage startups:

  1. If you are raising funds: Aspire to raise a larger amount than planned, since the next opportunity for fundraising may not come soon. This strategy is different than the past strategy of raising a very small pre-seed or seed round, getting traction, and then going for larger rounds.

Because, well, you will probably not be around for that round.

  1. If you are not or cannot raise funds: Cut down your expenses.Ruthlessly prioritize.

If you are still building your MVP, don’t invest in a sales and marketing team just yet, because they don’t have anything to sell.

If your product is ready, see where you can scale back on the R&D spend, and put all that you have in your sales team. Lean in. You are guaranteed to NOT get traction if you don’t invest in sales, so why not risk it?

  1. Track your KPIs. If they are looking good, you’ll survive. Focus on customer validation and your monetization path. Your metrics should prove two things:
  1. You’re actually solving a problem
  2. The problem is so significant that users spend a good chunk of time on your product, and not just two minutes a day.

Sad fact: If you are running out of money in 2016, and KPIs don’t look good – you’re in trouble.

  1. Approach your current investors, have a heart-to-heart. Figure out if you’re the favorite child, or the one who’s going to be left to die. If you think you might need money, discuss the possibility of bridge financing before you go for the next round.

I know the situation is difficult, but in the long run, this is a good change. Evolution is at work. The strong will survive. This will make companies more resilient, and will make sure the more deserving ideas get funded, and competition gets thinned. The capital to go around is limited, and with less startups clamouring for their attention, the money would be spent more judiciously.

However, if you’re the ones left in the cold…stop worrying.

Welcome to the graduation ceremony of the School of Hard Knocks. Learn from your mistakes, prepare for the next cycle, and come back with better ideas.

And if you need a sounding board for those ideas, I’m available on LinkedIn or email at sshroff@mystartupcfo.com.

Good luck!