3 Founders, 1 Round and $0.72 in the Bank

Posted by Jessica Alter /May 23, 2012 / FounderTalk

This FounderDating Guest Post was written by Brendan McCorkle. He’s a serial entrepreneur and hard at work on his second funded venture, CloudMine, a platform that automates back-end development for mobile app developers. As the CEO and Cofounder of CloudMine  he’s dealt with the scenario all startups are afraid of: running out of money before closing a round.

We were supposed to close our round at the end of February. This was not the initial goal (December) or the “this shit always take longer than you want” goal (January), this was the “you are now homeless” goal. In fact, I wouldn’t even call it a goal–this was the end. We’ve all read blog posts about the “valley of death” that many before us have trudged through while pouring their heart, their soul, and their savings into a startup. We’re familiar with the Edison quotes that it’s 97% perspiration and that most people who quit are 97% of the way there. It’s one thing to talk about hard work and commitment. It’s another thing to have two founders with a combined bank account balance of $0.72 USD.

We’d planned for this. We started raising during DreamIT instead of afterwards. We worked during the holidays (turns out, no one with money does, but what did we know? We got a lot of product work done).  Talked to everyone who would listen, and many who wouldn’t. I brought Marc and Ilya (my cofounders) with me to the more technical funds to show off how awesome our tech, and the team building it, were. It didn’t matter. The runway kept getting shorter.

So, what did we do?

We tried all the normal things first, of course. Lines of credit (maxed), money from friends and family (maxed), money from cofounders (poor Ilya–maxed), and we still had payroll between running out of money and getting money from the round. We consulted advisors and potential investors.  One of them, an angel investor named Derek Kleinow, helped us with our strategy and liked the way we were going, but this didn’t help us close with our other investors any faster. As founders, we have a disproportionate share of the upside of a business, but we also have a disproportionate share of the downside. Two things were clear: we were GOING to make payroll and we were likely to suffer personally for it. One thing was not clear: how?

As I mentioned above, we first tried to handle it ourselves.  In hindsight this seems a little silly, but it’s hard to have a long-term strategy when you’re constantly on the verge of “something happening.”  That entire six weeks was filled with the sense that we were just “a day or two” away from being done.

Once our own resources were exhausted we turned to friends and family.  Unfortunately we had already extracted the $25,000 we could get from them so that we could hire our first two engineers.

Along came an angel

In the middle of all this, I recalled a conversation I had with Derek about the hiring of our first two engineers. We were speaking about the strategic value of hiring engineers before we were “ready” financially. Essentially, this was a conversation about calculated risk. I remember he told me: “Let me be clear: I like how you think about this strategically. If the round takes too long, I won’t let you guys get in trouble.” Derek was opening the door for a later conversation, but at the time I didn’t take him too seriously because, of course, we didn’t think we’d need help.

Fast-forward a bit, and we were in desperate need of help. How serious was Derek? Would he actually front money from a round that hadn’t closed with no guarantee attached? I put off the call because I didn’t know how to ask for what we needed. I didn’t want him to say ‘no.’ I wasn’t ready for rejection but I really had no other viable options. With dread in the pit of my stomach, I called him and started: “We’re in trouble…”

His initial reaction reflected how we all felt at the time: “Shit.” Neither of us wanted to be in this position, but since we’d been consulting him on many decisions leading up to this, he knew what path we were on and what decisions we had made to get here. In fact, he didn’t just know–he agreed with many of them. It’s tough to agree to give someone money without a guarantee, or without signing anything. That choice was only possible because we had built a relationship throughout the last six months.

He ended up agreeing to front enough of his investment in CloudMine to make payroll. In exasperation, he made sure to sweeten the deal for himself: in exchange for this noble deed, he would be receiving a CloudMine t-shirt and a case of beer.

You have to ask

I am comforted by knowing that we have surrounded ourselves by awesome advisors, mentors, board members, and peers in the Philly tech community when times are tough. It’s too easy to get caught up in the everyday struggles of a small company and not realize that there are many people who have gone through the same struggles as you – and they’re just a quick phone call, coffee, or meetup group away. Cultivate these resources around you and you will end up owing a smart dude a t-shirt and case of beer instead of an eviction judge an appearance in court.

CloudMine closed an oversubscribed first round shortly after the events of this story and has gone on to grow the team to seven people, and 2 more interns joining the fray shortly. Everyone always says this shit is hard. I’m telling you it’s possible. Don’t be afraid to ask for help, especially if you foster the relationships you will need along the way.