1) Cash In Reserve — At the early stage, especially seed, chances are you will keep pivoting till finding product-market fit. At Tau Ventures we advise entrepreneurs with four main principles:
- to start fundraising at least 6 months before running out of cash
- to raise 10% more than what their plan calls for
- to keep that 10% for emergency
- to have a strong syndicate that will be active (usually in the form of a lead) rather than a party round of many investors that will be passive.
That said we have seen almost every conceivable situation, from startups raising small rounds that can barely increase their dwindling reserves to startups raising huge rounds while having overflowing bank accounts. Whatever specific financial strategy an entrepreneur chooses though will most certainly affect the success of their pivot. If you like to fly the plane close to the ground that won’t leave a lot of room for experimentation or error. VCs that do their diligence and invest in companies with that profile are going to be averse to pivots, as should be the entrepreneurs.
2) Timing — Entrepreneurs naturally gravitate towards pressing needs. But there is a fine line between opportunity and fad and nothing illustrates that better in 2020 than covid. At Tau Ventures we have been pitched numerous companies this year addressing the pandemic, from drug development and diagnostics, to food delivery and social interactions. If a company was built solely around covid we passed on that investment opportunity because we didn’t see a long-term need. We did have companies in our portfolio that did significant pivots with covid, in some cases completely revamping their business model. We were supportive if those decisions were existential (without the pivot they would have failed) or well-thought (with the pivot they could get some gains without jeopardizing the core focus). But we actively discouraged our entrepreneurs from chasing two birds if they already had one in hand, and it continues being our counsel for a well-executed pivot.
3) Refactoring — Refactoring is one of the scariest words in tech, it means restructuring your code without changing its external behavior. It is usually a few months of work and means you probably built your architecture in a less scalable way to start with. There is indeed a fine balance between planning for the long-term and hacking for the short-term when you have limited resources, time and people included. At Tau Ventures, given we are seed investors in applied AI, we look more for entrepreneurs that are invariably thinking ten steps ahead. Refactoring, in fact pivoting overall, is fine as long as it is intentional rather than forced upon the company. There are certainly investors at different parts of the spectrum, for instance if you are investing or building a company on fast-changing consumer tastes.
4) Reincorporate — Should you dissolve the current company, returning as much of the funds to existing investors as possible, and then restart fresh? If there is a board you will need their approval — you may actually control the vote — and should be prepared for some reputational impact at least in short-term. There are also pending contracts, partnerships and IP that would need to be transferred which would escalate legal costs. Finally there is an impact on morale and you could lose employees. That said, if you can work through these three main challenges there are certainly three worthwhile benefits. A company having started 2 years ago will definitionally have stronger momentum than the same entity being 5 years old. You could argue it is a matter of perception but it does matter, especially to future investors and hires. So does a clean cap table. Doing a reincorporation removes the spectre of a recap i.e., a new investor requiring the current cap table to be wiped away for them to invest. Lastly, if you position it correctly the reset button can actually reenergize your workforce.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
