Thread by @fintechjunkie

Founders are busy re-structuring their operating plans to reduce burn.

A reduction in burn almost always slows growth which #VCs will interpret as a negative signal.

The result is confusion and loads of bad advice.

Is this a solvable problem? 🧵👇

Initially, a startup is merely an idea and the goal of a Founder is to learn every day and adjust their startup’s operating plan based on these learnings.

If they’re right they’ll build something special.

If they’re wrong they’ll lose their Investors’ money.

A big piece of the Founder’s job is to answer the following questions:

👉How much can I learn for how much money?
👉How quickly can I learn what I need to learn?
👉What is the cost to scale into independence?
👉How high is up?

The answers to these questions matter a lot.

If it would only cost $1 and take 1 day to learn whether a startup’s product was going to fly off the shelves at a premium price, you would always say yes to the investment regardless of price.

But learning agendas aren't cheap and they play out over long periods of time.

Which leads us to capital availability.

Without capital a startup can’t survive so understanding how Investors allocate money is critical.

And almost every Investor starts with the same high-level philosophical truism:

Capital should flow into emerging attractive businesses.

This means that traction matters.

This means that proving out assumptions matters.

This means that the quality and profitability of the product matters.

The key to raising capital is to convince an Investor that a startup is on the right track to becoming an amazing business.

A good rule of thumb is that a startup will be attractive to Investors if it’s growing fast while proving out critical business drivers.

All startup’s “everything goes right scenario” can pass this test but we’re not living in an “everything will go right” environment.

Founders know that capital preservation is critical in this environment but they also know it will result in a reduction in growth and learnings.

And since fundraising centers around “proof of being on track”, a reduction in growth and learnings matters!

This creates a “tyranny of the or” scenario for many Founders. They believe that any move they make will make their startup worse.

But they also know that doing nothing isn’t an option. They feel trapped.

And this feeling of being trapped has a name: Zugzwang

Zugzwang is a German word that means “compulsion to move”. It’s been used in turn-based games like chess when a player is put at a disadvantage because of their obligation to make a move.

A player is said to be "in zugzwang" when any legal move will worsen their position.

I’ve talked to Founders who feel like changes will reduce their odds of success.

👉Their strategy is working.
👉Their teams are hitting their KPIs.
👉Their assumptions are being proven correct.

But they’re being told to “make a move” to preserve cash. They’re in Zugzwang.

While this may be true, Founders have to play the game that’s on the field.

Doing nothing is equivalent to a “thoughts and prayers” strategy and gambling that the environment is going to miraculously improve.

Doing nothing isn’t a real option.

Option 1: Focus on COM6

COM6 stands for “Cash Out Minus 6 Months” and it’s a critical point-in-time to obsess about because it’s when a startup will need to begin fundraising.

A Founder should always focus on delivering an attractive business at COM6.

Understanding a Startup’s COM6 profile under different versions of its operating plan creates an anchoring of critical decisions and a framing of investment tradeoffs.

Preserving cash to avoid today’s funding market can work if an attractive COM6 plan can be assembled.

Option 2: Insider Support

VCs are doing what they can to protect and support their best companies given today’s fundraising environment.

Most VCs have gone through the exercise of ranking their existing companies and have prioritized follow-ons in their very best companies.

Insiders have an information advantage and understand the cost of tradeoffs so “passing the hat” can help a Founder escape Zugzwang.

Insider rounds have gone from being a signal of weakness to a signal of strength. Round extensions have gone from the exception to the rule.

Option 3: What Would Kirk Do?

One of the most famous stories in the Star Trek universe has bled into the business world because of how applicable it is to many supposedly “no-win” situations.

The story in question is the story of the Kobayashi Maru.

The Kobayashi Maru is a training exercise designed to test Starfleet Academy cadets by presenting them with a no-win scenario.

They aren't told they're being set up to fail. It's a test of their character under pressure.

The goal of the exercise centers around a damaged civilian spaceship (the Kobayashi Maru) which is stranded in dangerous territory.

The cadet has to embark on a rescue attempt which will endanger their ship and crew or leave the Kobayashi Maru to certain destruction.

If the cadet chooses to attempt a rescue, an insurmountable enemy force attacks their vessel.

If the cadet leaves the Kobayashi Maru, it’s destroyed by the enemy fleet.

The cadet’s character is tested by being set up to lose.

But James T. Kirk became the only cadet it the history of Starfleet Academy to defeat the Kobayashi Maru simulation. He did it by reprogramming the test.

After failing the simulation twice, Kirk refused to engage the simulation a third time without changing the rules first.

If it’s impossible to preserve cash and remain a venture fundable business then a Founder should ask: “What would Kirk do?”

Stepping outside the traditional rules of the VC game might allow a Founder to redefine the game itself. They might be able to design a winnable game.

For instance, I’m working with a startup that’s been hit hard due to the interest rate environment. Their value proposition is amazing, they have no real competition and their execution has been on-point.

But all major metrics are heading in the wrong direction.

They could continue to deploy capital and grow revenue significantly over the next year, but this would cause them to run out of cash and have to raise with worsening metrics in a crappy industry environment.

Chances of a successful raise: Slim.

They could cut marginal activities and grow revenue slowly, but this would only delay the fundraise by a few quarters and the metrics would suggest that the company was no longer a “high growth venture backable” company.

Chances of a successful raise: Slim

What would Kirk do?

One option would be to go into “full turtle mode” by turning off almost all growth activities which would preserve the cash the company had on its books.

Revenue would decrease but burn would collapse to a level that would give them “near infinite runway”.

This option would allow the company to outlast current market conditions and re-boot growth when conditions improve.

As long as they post VC growth metrics before their money runs out they’ll be just fine. And they’ll have the ability to be patient given their cash position.

TL;DR: The path to greatness might look chaotic or it might look organized and thoughtful but the truth is that the only thing that matters is actually getting there.

And getting there requires cash so re-factoring your plans to maximize your chances of survival is crucial.

And here's a link to the first tweet if you want to like and share!

https://twitter.com/fintechjunkie/status/1588926531547541504?s=20&t=f-FZXTXaf-Mgi8GQr46cag