In any VC portfolio there are going to be companies that need to restructure or pivot. We just had that situation arise for one of our portfolio companies: after raising $9mm+ and a few years of hard work, the team built an incredible technology but couldn’t build a profitable company around that technology. They’ve now pivoted and are using the technology to do two things: i) Auto-summarization of video. Our software can sift through a video clip and pick out the highlights to make a shorter and more exciting clip; and ii) Recognition. face, motion, and object recognition in the video surveillance and home automation spaces. If you or someone you know could be a customer, contact me (firstname.lastname@example.org). Now that the shameless plug is done, let me share with you important take-aways from our restructuring/pivot:
-Make sure you can get to cash flow positive. Our portfolio company had to do a number of layoffs and is only keeping those employees which are truly critical for maintaining the current revenue and advancing the pivot. The business is now profitable. Make sure your company can cut its way to profitability if need be. If you can’t do this today, you’re already in trouble.
-Have a pivot. Once you restructure and make cuts, you need to make sure you’ve got a pivot ready for the product. Clearly the old product or method wasn’t working, so innovate into a new product. This will give you a second life and also convince your board members to give you more time or financing. After all, you’ve learned a lot from your mistakes and are now building a new company around the pivot. Don’t be surprised if some of your board members actually get excited.
-Stay lean personally. Most Series A and B startups have founders making $100k+. As a founder even if you have a comfortable salary, make sure you’re still living lean and stashing as much cash as you can because there may come a time when you have to go without a salary for a while.
-Only pay those vendors that are important. Your attorney is important so make sure to keep him currently paid. The landlord that you’re now paying for office space you don’t need because you just cut a bunch of staff is not crucial. If he/she won’t work with you through this tough time and provide rent abatement, stop paying. Same goes for vendors which you don’t absolutely need to keep the business going.
-Don’t worry about your equity right now. As of today it’s probably worth zero, but you and the critical employees that are still at the Company will receive fresh equity in NewCo should things go well. As the pivot becomes successful, you’ll be in a position to negotiate attractive new equity with your investors. If the investors don’t want to play ball, you’ve got shitty investors and need to walk away.
Hopefully you never have to pivot your business, but make sure you have a plan in place in case you ever need to.