Last month, in a well-received article published on Crowdfund Insider titled, “When to Pivot, When to Fold: What Every CEO & Investor Needs to Know”, I described a few scenarios where a CEO should consider changing direction or throwing in the towel altogether.
Don’t get me wrong, like Winston Churchill, I don’t believe in ever, ever, ever, ever, ever giving up. However, I do feel that a CEO has a moral obligation to her employees, partners and shareholders to halt any and all economic bleeding. Given this fiduciary responsibility, the most resilient approach is not always the most courageous nor the most honorable one.
Unfortunately, instead of having the decency to admit defeat, some CEOs opt to prolong the inevitable with constant cash infusions from outside investors. While these “capital band aids” may satiate a bruised ago, prevent immediate insolvency and temporarily curb the hemorrhage, it doesn’t cure the ailment or heal the wound. In fact, in many instances, all it does is deceive unwitting investors and further dilute existing shareholders.
With the reliance on outside capital to stay alive, fundraising often becomes a crutch to execution. With less pressure to generate sales, some companies find themselves in a never-ending fundraising cycle. I wonder how many businesses would rush to pivot or fold if its CEO was bankrolling the company as opposed to outsiders. This is something that every investor should ponder.
Just like a Government can’t print its way to prosperity, a company cannot perpetually raise its way to an exit. It eventually needs to deliver desired products and produce real revenue. Just ask the CEO – currently out on a roadshow – trying to close a Series Z round. That CEO, now an AARP card carrier, was a mere thirtysomething years-old when the company’s Series A was completed. That CEO shouldn’t be out raising money, he should be home watching Matlock reruns!
This leads me to investmer tip number 7: stay clear of the serial fundraiser. Before you invest, always make sure to obtain a copy of the company’s cap table. See how many rounds were raised – when and at what prices. Sometimes you can locate private company financing information via Form D filings on SEC.gov.
It is also necessary that you find out the actual date of when the current round commenced. This may take some detective work as some issuers – the ones not gaining any investor traction – have been known to alter the dates on offering documents. Hot deals are rapidly oversubscribed and quick to close. Cold deals tend to linger. If the current round has been open for more than a few months, it may be a sign that the deal is toxic.
This article was originally published on LinkedIn Pulse
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