January 23, 2014 | 5-minute read (872 words)
I don’t think I need to make the case for raising capital for your startup. For many companies, bootstrapping will only get your company so far...and then, in order to grow bigger, faster, it’s likely that you’ll need some additional capital from an outside investor.
But you already know that.
What you may not know is that there are good times to focus on fundraising and, well, not so good times. If you think that you’re ready to start pursuing investors, you need to make sure that the time is right.
If any of the following situations describe your company, you may want to think again before seeking funding at this time:
1. You can't afford any distractions. When you start fundraising, this can become a full-time job. Fundraising takes the focus away from your company and all the work you need to be doing developing your core business. Researching VCs, networking, making connections, pitching, negotiating—all of this is a time suck. Don't go there unless you have to. And, equally important, once you go there, commit to it. You don’t want to fundraise half-assed, so make sure you’re ready to commit to the process before you dip your toe in.
2. You don't need it to grow. Your company can grow, earn revenue, and gain traction, all without a VC dime. Sure, investor money can help you to grow bigger faster, but that's not always the right path for a startup. In fact, many a startup has suffered from rushing to scale (see my previous post Is Your Startup Dangerously Rushing to Scale?). So, before starting the fundraising process, make sure this is the right path for your company, right now.
3. You don’t have a solid business model. If you don’t have a clear understanding of your business and your value proposition, how are you going to communicate your potential to investors? Investors want to know their ROI (and it better be huge). Until you are clear on your market, your competition, your differentiating factors, and all that jazz, you’re not going to be able to convince anyone to invest.
4. You’re lacking a financial plan. Are your finances in order? Have you thought through your financial forecast? Performed both a bottom-up and top-down financial projection? Planned your budget? All your financials need to be in order before you approach an investor. They will want to know how much you are asking for and what you plan to use the money for. Establish the milestones that you hope to achieve and calculate the spend to achieve these milestones. That’s your ask.
Contact Early Growth Financial Services for help building your financial plan.
5. There’s no clear path to profitability. You don't already need to be profitable in order to get funding, but you do need to be in a position to achieve profitability. Have a plan of how you're going to get there.
6. You don’t have a team in place. Investors will occasionally invest in a single person, but it’s not a common scenario. More likely, investors will be willing to invest in a well-developed team that can demonstrate a well-balanced combination of skills and experience.
7. You haven’t fully committed yourself to the vision. Before an investor puts their money into your business, he needs to see evidence of how you have invested in your business. What have you accomplished? How can you demonstrate your focus on—and commitment to—your startup?
8. You have no investor connections. If you don't have a direct connection to an investor, you're wasting your time. If you want to focus on fundraising, first focus on making the kinds of connections you need with investors. Reach out to your startup ecosystem (trusted business partners) for introductions. Do your research. Find an “in.”
9. You don't have your pitch materials at the ready. Before reaching out to investors, you need to have all of your fundraising materials at the ready, well-developed, well-thought out, tested, and finessed. Read my previous posts Pitching Made Perfect and 10 Tips for Crafting Your Executive Summary for practical advice on creating effective fundraising collateral.
10. You’re just not ready. Don't start down the fundraising path until you are ready—really ready. It's a waste of your time to try to pitch investors before your company is ready. It’s also a waste of investors’ time and will leave a bad first impression to leave with potential investors who may have been interested in you further down the line.
As you approach fundraising, it’s important to remember that fundraising itself isn’t the goal and to not get too caught up in the process. It’s not how much you raise that matters; it’s what the money enables you to do that will determine your future startup success.
Is your company ready to raise startup capital? Tell us about your fundraising approach and journey in comments below, or contact Early Growth Financial Services for fundraising advice.