Future Funds, Founders and Why You Should Quit Bitching!

I spent the first month of lockdown taking calls from frantic founders and trying to seek solutions to address the mass uncertainty of the startup community. It was soul destroying in a way that the rest of the business community couldn’t ever understand, the reason being that these disruptors and innovators already have the odds stacked firmly against them; building for a customer that doesn’t yet exist, relentlessly pivoting and reshaping the business, doing it all on a shoestring. It’s the cruelest of the cruel for those teams who have started to make some significant breakthroughs, only for them to die in this way. I’m not being sentimental, or maybe I am. This is my community, I have taken it extremely personally.

The Government has stepped in of course with the Future Fund and furlough, and on paper everyone should be able to just about hang in there except for one thing — one of the layers in the ecosystem was forgotten about, let me explain.

Startup 101

A startup has two fundamental components 1) they are trying to solve a problem 2) the solution is not obvious and success is not guaranteed.

The community has four layers:

Unicorns — tiny %

Angel/Venture backed (<£250,000) and on their way — bigger %

Starter Uppers (potentially small amount of money raised) — practically the whole damn pie chart

Proof of Concept — bigger than tiny %

I could have put this into a nicely presented infographic, backed with data points and sources, but I have neither the time nor the inclination. Just trust me on this one.

In terms of crisis monies being made available by the Government, this is how it plays out:

Unicorns — private side deal being done

Angel/Venture backed (<£250,000) and on their way — Future Fund

Starter Uppers (potentially small amount of money raised) — erm…. furlough for a limited few

Proof of Concept — furlough

This is not a critical piece, far from it. Of course, Unicorns need special consideration. I also personally and perhaps controversially agree with the principals of the Future Fund and I’m extremely grateful to those who have shaped it. Some of the terms are a little, shall we say, optimistic but I think over the next few weeks they might be slightly softened and it will work well for those who are both facing financial difficulties and meet the criteria. Notwithstanding the same, the general consensus from fund managers I have spoken to is that if their portfolio company is running low on cash, they would write the cheque themselves, which is exactly how it is meant to be. If a team doesn’t have any support from their backers, that’s on them; now might be a good time to look in the mirror. If teams reached the end of the runway before the world went mad the Future Fund would do nothing more than prolong their death — (don’t @ me — the truth sometimes hurts). I don’t know why it is so hard to understand that the Future Fund is not a ‘leg up’ initiative and it certainly isn’t a surprise windfall; founders, you need to get over yourselves! If you really understood how this whole crazy world works (and you should because you are in it), you’d be agreeing too. Quit bitching!

Furlough works perfectly for the proof of concept cohort, the “great idea folk”, those still exploring. Many won’t actually need it as they will still be working on someone else’s dime but for those who took the leap, hibernation is probably the best thing for them right now. No harm will come to them, they should build their energy for the road ahead. It may not seem like a gift but believe me, it is.

So let’s turn our attention now to the black hole, the “Starter Uppers”. This is a real mixed bag, a pick and mix if you will, lots of different stages of growth, all have different needs, it’s difficult to try and structure this category in any meaningful way. A small proportion are able to utilise furlough. Furlough by the way means not working at all contrary to the nudge nudge, wink wink, you won’t get caught advice which we have seen from several law firm seminars and business support providers in recent weeks. Apart from the glaringly obvious tax fraud element, how will founders explain the significant growth during COVID-19 to their investors if they were all furloughed, how will founders be viewed and trusted by their team when you advocate cheating the system? I’m all about the hustle guys but really you are better than this!

It’s difficult to predict how many in this vast pool of entrepreneurs will actually make it. This isn’t a negative statement. There are too many factors in play. The unsexy edtech sector might suddenly become an investor favourite (I’m home-schooling and let me tell you that someone needs to do something!), those founders who demonstrate true resilience and adaptability at this time might make them more investable. I don’t have the answers but Uber, Groupon, Whatsapp all made their way out of the 2008 recession, who’s to say the next batch of unicorns aren’t already hatching?

So what do we do about getting a lifeline to the blackhole residents and why should we expect the taxpayer to fund this? The why is easy, those who have a strong value proposition, have raised a small amount of cash and can demonstrate some early traction are in ‘access to capital paralysis’. Yes conversations are ongoing but investing in an early stage startup is relationship based not Zoom based. Even if a team can jump the first hurdle we will start to see rounds taking longer to close during which time it will be too late. Help is needed now.

An emergency buffer of sorts is then the most realistic approach, not a bucket load of cash (startups will actually need less cash moving forward — burn rates will adjust significantly due to market conditions, remote working etc) but a ‘something’ is needed because the risk of doing nothing will lead to certain death which will take years to recover from and what a tragedy this would be.

As to the target this needs to be carefully curated because, well I am just going to say it, we all know there is a lot of ‘Uber for’ out there (don’t pretend you don’t know what I mean). Lawyers and VC’s can’t advise on this collective or how to shape the support, it’s not their sandpit. Maybe one idea is to go to the coal face. Mobilise accelerator program managers who have already extensively screened teams for viability. They might not be able to tell you how long it will burn for or whether it will produce much heat but they do know the difference between a solid fossil fuel and a piece of mud. Speak to community leaders (the real ones) about their networks. The right conversations will produce the right candidates.

The ‘something’ lifeline will be shaped by the targets but a soft loan or non-matched convertible springs to mind, potentially something to cover the burn rate for 3 or 4 months. I don’t know, I’m still thinking about how best to shape it to be honest.

The startup community is just one big conveyor belt with countless stakeholders. Everyone has a strong view about how to navigate COVID-19 and where best to direct Government money but the difficulty is that everyone comes to the table with their own agenda based on where they are positioned on the line. I’m not suggesting that my views are better than anyone else’s, or that they will even be popular, nor do I hold myself out to be an industry expert, far from it. But what I can say with absolute certainty is that approaching the problem from a ‘how do founders quickly access free cash’ instead of ‘how do we emerge from this pandemic as a vibrant, visible and healthy startup community” is damaging to all and setting us all up to fail.

There aren’t many founders who haven’t experienced hearing the rattle in the back of the train when the front is outperforming and gaining momentum. This, my friends, is our rattle. We can simply ignore it, we can send one person with a flashlight and a spanner to try and fix it, all the time hoping it will hold, or we can slow the train down ever so slightly, find a budget and deploy the right team with the right tools to rectify the identified problem outright. Now to figure out who is managing the train.