Monday, May 2, 2011

Lesson #28: Expect the Unexpected -- Always Have a Cushion

Posted By: George Deeb - 5/02/2011


& Comment

On the morning of September 11, 2001, I was sitting at my desk working on the final draft of a $4MM venture capital financing, that was due to close on September 15, 2011.  It was the last round of capital that iExplore would need to bridge it to profitability.  It was a very exciting time for the business and continued the validation of our business model.  Then I heard a commotion in the office, as our staff was gathering in the conference room, huddled around the television.  As I walked into the room, 45 people were glued to the news broadcast of two planes having crashed into the World Trade Center, in an obvious act of terrorism on the U.S. soil.

My head of sales and operations at the time was a seasoned travel industry veteran, formerly with Abercrombie & Kent, a leading tour operator in the industry.  He had remembered the first Gulf War and the negative impact that had on the travel industry.  By the look on his face, he was clearly troubled, and pulled me into the other room.  He basically said iExplore should prepare for the worse, that travel sales were most likely going to come to a halt in the wake of 9/11.  I was still wrapped up in the moment, trying to digest the falling towers in NYC, and wasn't really sure what was going to happen in term of future travel sales.

But, those words of caution surely proved true in the days that followed 9/11.  The investors that were supposed to fund our last round, got nervous and pulled their committed funding.  And, sure enough, travel sales fell off a cliff, at exactly the same time the company was nearly out of cash (optimistic the venture funding deal was only a couple days away).  But, in the words of show business, "it ain't over until the fat lady sings".  And, iExplore found itself with 45 employees, no cash, no prospects of cash, a ton of debt and no revenues, staring over the edge of the abyss and at the precipice of bankruptcy.  In one fell swoop, a really exciting time in iExplore's history, became its worst nightmare and darkest moment.

In the months that followed, we ultimately got through this difficult period (I will save the details for my next post).  But, the point here is to always have a cash cushion and plan far enough ahead.  I should have never let the cash position get near zero, on the 95% odds a venture round was closing in a couple days.  Regardless of the opposite advice I got from my board, I should have had at least a few months worth of cash on hand, by the time a venture capital round was supposed to close, leaving a cushion in case anything delayed the deal.  A valuable lesson for next time.

So, when doing your budgeting and fund raising, always assume you will need 2x the money you think you will need, 2x the timeframe to acheive profitability and 2x the length of time required to close any financing, and that should leave you with enough cushion to get through the bad times or any delays.  Building cash reserves like this is not always easy for a startup, but it is critical if you want to survive any and all scenarios.  So, where you can, keep your expenses razor thin until revenues or funding allow you to do otherwise.  And, do your best to "turn pennies into manhole covers".  You'll never know when you'll need them!

I hope you enjoyed today's post, coming out of today's news about the death of Osama Bin Laden.  Bringing back some very bad memories, not only for the country, but for iExplore, as well.

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