Sometimes you raise a VC round and it hits you—you don’t have a VC-scalable company. Now what? Statistically, it makes sense given the power law, but you have a company to run. Brice Scheschuk has seen this time and again in his decade-long career as an investor; speaking with TechExit.io, he shared his advice for founders in this tricky situation.
Key takeaways:
- To make any recalibration work, you need to have a basic understanding of your ideal customers, initial product-market fit, and go-to-market motion.
- You have to be honest with yourself and your investors as soon as possible; denial and false hope will only lead to ruin.
- The ideal scenario is your existing investors offer a bit more cash to empower a recalibration from VC-scale to profitability.
One day, that sinking feeling finally hits you—the company is not going to hit its VC-scale valuation.
You raised a VC round because you had a big vision. Or maybe you felt like you had to take venture capital because that’s what the tech media glamorizes.
Regardless, you’re realizing now that was a mistake. But you also have investors breathing down your back, expecting 100% growth per year.
What’s a founder to do?
This is a situation Brice Scheschuk has seen a few times in his decade-long career as an investor. Speaking with TechExit.io, Brice shared his advice for founders navigating these choppy waters.
First: Be honest with yourself and investors
This is going to be a painful step. You raised on a big vision—one you perhaps still believe in—and your investors have significant expectations.
Perhaps you raised during the heady days of 2021 or 2022 and things looked rosy. Or maybe you raised during fear-based markets of 2023 and now face immense pressure to be the success story.
But if VC-style growth is no longer a realistic possibility, you have to admit it before things truly go bad.
“Some people blame the founders, some people blame other people in the cap table—and by the end of it, nothing can get done,” said Brice. “And then you hit runway issues; you hit a wall, and then really bad stuff starts to happen.”
Second: Recalibrate your cap table
Realistically, Brice said companies in this position only have one good option: downshift expectations and target profitability rather than hyper-scale.
That’s not to say you can’t turn things around long-term and become a VC-scale business in the future. But it means if you don’t recalibrate now, you’re likely going bankrupt or forcing a shut down.
Brice’s advice is to look to your existing cap table and core investors— then “be honest around the table.”
“I would go to my insiders and I would say, ‘Do you want to continue funding this? It looks like it’s not venture scale—I need to lean down this company and get rid of burn. Then I need to do a raise to get me to profitability.’” said Brice.
To make this pitch a success, Brice said you need to come with four key pieces of information:
- Customer understanding: Who is your ideal customer profile (ICP) and what’s the pain they are willing to pay you to alleviate?
- Product-market fit (PMF): How can you defensibly claim that customers need your product?
- Go-to-market (GTM): Do you have an understanding of how you’ll reach and convert your ICP to your PMF-driving core features?
- Basic unit economics: Do you have a general understanding of your customer acquisition costs and payback time?
Unfortunately, Brice said without those elements, “there is no deal to be done” and you might be looking toward an acqui-hire and a job rather than an exit with a return.
Third: If you have to, look outward
If you can’t raise from your existing cap table, you will have to raise an external round.
Typically, one of two restructurings will happen:
1. A “Hope Note”: This is when the old investment is boxed into the existing cap table, paying out only above a certain exit valuation.
Brice said this structure might come through if new investors feel strongly that the company can (1) become profitable and (2) eventually sell for an attractive, if not VC-level, valuation.
2. A haircut: If there’s less certainty in the business potential, new investors might require a devaluation of other equity holders and put their investment into a new stack of capital.
Brice added that if he were the external investor in either case, he’d also likely join the board and bring in 1-2 more industry-knowledgeable operators to join as well. While he’d want founders to retain enough equity to be motivated, he said joining the board is about fixing the company’s trajectory.
“We all recognize there was a misalignment of capital,” said Brice. “It should not have been raised [as a] VC deal. We now repair that and we go forward.”
There’s no shame in profit
There is no shame in small exits or changing the company to survive another day—the only shame would be the company going bankrupt or failing when it didn’t need to.
You may end up scaling that business in the future. Or you could exit for a personally life-changing amount of money.
Not having a venture-scale business doesn’t mean you aren’t a successful entrepreneur and doesn’t mean you can’t make millions through profit rather than exit. It’s just that sometimes you don’t get there until you admit that VC wasn’t the right call.
“The real answer is to stop the bullsh*t,” said Brice. “Every day spent fumbling around in this purgatory is bad for the founder… it’s a form of bravery to embrace taking the bull by the horns, dealing with your shareholders and board, and finding an alternative [path forward].”