It comes as no surprise that some early stage companies get started with a bang because they are flush with capital from family, friends and early stage angel investors.  The excitement is palpable when some of this money has created “buzz” – articles in major newspapers and technical blogs, or TV coverage – all expounding on their products or services and how they will change our world.  By now, the management team, punch drunk on the good publicity, is convinced they are on the right track and expect the phones to ring off the hook from venture capitalists and other investors all clamoring for a piece of the action.  A major hiring and spending spree ensues, driven by the belief that outsized growth is quickly going to take over.  Forecasts and valuations are revised upwards to account for the fresh new optimism.  Concepts like “managing cash burn” and “increasing revenue traction” are fleetingly discussed at team meetings or around the water cooler in this “anything is possible” environment.

Reality Sets In

In 1999 or early 2000 at the height of the dot-com boom, this scenario may have ended with a happy outcome.  Venture Capitalists, having read all the publicity and anxious to get on the train, fund a Series A round based on generous pre-money valuations, little to no due-diligence and guidance that the money is to be used to expand hiring and spending at an even greater rate.  That was then – now we are in a different world. Read more »