Restructurings Are on the Rise

July 2, 2009 at 3:35 pm

Since 2008, more and more vc-backed technology companies are finding themselves in a very difficult situation. Their sources of capital have run dry, and even with good ideas or good products plus customers and revenue, they may still find it difficult to raise enough capital to continue business as usual.

In recent months, I have written about the problem with the venture capital industry as a whole. This post will deal with the inevitable fallout of the venture capital problems, and that is – what is a company to do when it runs out of cash and its investors can’t or won’t provide follow-on financing? 

Surviving Without Additional Capital

Nowadays, most vc-backed tech companies are facing the challenge of surviving with little new resources, and increasingly it forces them to restructure themselves for survival. These restructurings are best instituted with outside assistance from someone who can bring a fresh set of eyes to the issues and be able to focus on the bigger picture, which may have been lost due to the complexity and challenge of the issues at hand. The Brenner Group has been providing such restructuring services for tech companies since 1987!

When we are called in, the first thing we do is to work with investors and management and find out if there is enough substance in the product and technology to even try and restructure the business. In many cases, the answer is “no” which may be hard for an entrepreneur to accept but can often occur in popular but crowded market sectors. However, we often find there is substantial traction and/or IP that is worth salvaging which will lead to the development of a restructuring plan.

Top Priority is Cut the Burn

The earlier a company faces the challenge of not being able to raise significant institutional capital and assembles a restructuring plan, the more resources will be left to work with to move forward. The first thing that needs to be addressed is SURVIVAL! Survival means reducing the cash burn (the net amount of money a company spends each month.) The largest spending category contributing to the cash burn is usually headcount. When headcount is reduced, many categories of spending follow, because they are linked to headcount.

But my experience has shown me that most times the first headcount reduction is not carried out completely and requires a second or third, or even fourth reduction which may seriously hurt morale, as employees do not know when the next reduction in force (“RIF”) will occur. Effecting one RIF instead of many is essential and can actually boost morale and allow the company to increase the productivity of the remaining employees.

A restructuring requires a zero base budget to be prepared without any regard to the existing spending levels or headcount. The restructuring expert, from firms like The Brenner Group, helps companies prepare this zero base budget. The key inputs to the budget process are: (a) how much cash do we have?, and (b) how many months must we survive until we reach cash flow breakeven or cash flow positive or close additional funding? This budget will then be worked, and reworked, to see what can be accomplished with the remaining resources available to the company.

After the zero based budget has been completed, matching existing people to this budget allows a company to determine which employees fit the new budget and job definitions, and which are excess in the short term. These remaining people fill the necessary roles to get the company to cash flow breakeven or a funding event sometime in the near future. That is what survival means, and it often means losing some very good people, who cannot add enough value or are just not affordable in the short term.

Restructurings Often Lead to Wash-out or Re-cap Financings

Restructuring might also mean that a small amount of capital may be required even in the reduced spending scenario. This would mean raising new capital from existing/new investors or friends and family, but could be at a significantly reduced pre-money valuation – maybe even close to zero. This is called a recapitalization, and many times is part of a restructuring plan. A recapitalization round of financing will typically dilute, or “wash out” existing investors and employees. Plans must be in place immediately after the recapitalization to re-incentivize the employees who remain after the restructuring. New investors will have to understand that this needs to be accomplished, or the restructuring will not be successful. Again, restructuring professionals, such as The Brenner Group, can help determine how to accomplish the recapitalization of the company.

There are many more facets of a restructuring which will be addressed in future posts.

Rich Brenner is Founder and CEO of The Brenner Group, one of Silicon Valley’s premier professional services firms. Rich is a veteran executive, entrepreneur, investor, board member, and philanthropist.


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Entry filed under: Restructurings, Shareholder Services.

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