How can we convince investors to stay with us?

Q: I am entering into negotiations with VCs for the next round of financing for my optical telecom company.

Dec 1st, 2003
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Q:I am entering into negotiations with VCs for the next round of financing for my optical telecom company. Our revenue projections cannot cover the burn rate required to maintain the capability to ship products. Any advice based on your knowledge of what's going on?

A: It is unfortunate that 90% of the companies started during the bubble are in the same boat. Since situations and player attitudes are all different, I can only make some general suggestions to help you come up with your own approach. In most cases, the company approach generally goes something like this: We have pending orders. Here is the runway that gets us down to zero in so many months. We have cut back as far as we can but still need X millions of dollars per month to keep the team viable to ship products. And the story ends there.

From the investors' viewpoint, they are not there to keep the doors open 12 months at a time only to face the same discussions again. The problem is they have heard the same story from many other companies, and what they've found is that the pending orders usually get pushed out and only a few of them ever materialize, and they do not believe further cutbacks cannot be done when push comes to shove.

The good news is VCs generally do not want to close down an operation if they can at all rationalize further investment. A write-off makes them look bad and also reduces their income, which is based on net investments. All startups require investments to keep their doors open, nothing new here. Investors are there to make dreams reality; the problem is not having a credible vision to give them the reasons to invest. So, you need to present a vision backed up by facts of what the future might bring, coupled with changes in the way you go about it. Indicating a willingness to share their pain may make it a bit easier for them to invest after losing millions. Maybe headcount can go down further by doing more things by yourself or closing down lines that are more for convenience than need. And also indicate a willingness to induce some pain in dealing with customers. Don't forget customers' optimistic revenue projections are what got us here in the first place. It is easy to accept customers' orders based on optimism, but you may get to the truth if you ask for down payments to back up their orders. That's not easily done, but you might just get a feel for whether they really have faith in their projections to give more credibility to what you say to your investors .

There is always the possibility that investors go in with the expectation of closing down the company. You may want to be prepared to ask for some of the assets that mean nothing to them but a lot to you. If the business no longer makes economic sense, closing down may be the most merciful thing to do. People can move on to doing things that have a future. Prolonging the pain does no good for anyone involved.

Q:How do I grow my laser job-shop business?

A: I will use analogies since I am not familiar with your business. A machine-shop owner once told me that his business is a difficult one because of the margins customers are willing to pay. His strategy was to use his machine-shop business to absorb overhead while developing a business selling a propriety product line of auto-racing components, which is quite profitable. I suspect your business is not much different. So, my suggestion is to first grow your core business by serving your customers particularly well and also to broaden your customer base to give your business a cushion for stability. You can also expand the kinds of services/products you offer to your existing customers, such as assembly work. At the same time, look for ways to use your capability toward higher-margin possibilities.

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MILTON CHANG is managing director of Incubic, a venture fund dedicated to helping entrepreneurs build great companies. He was president /CEO of Newport and New Focus, and is currently on the boards of Arcturus Engineering, Lightwave Electronics, OEpic, OpVista, Rockwell Scientific, and YesVideo. Send your questions on career matters, starting and running your own high-tech business, or manufacturing and operations to miltonchang@incubic.com. Visit www.incubic.com for other articles he's written.

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