The good, the bad and the ugly time to raise money for your startup
Six questions to ask yourself to understand which time it is for you
Startups spend an incredible amount of time and nervous energy on fund-raising, getting ready for it, or worrying about it. No wonder – most of the news one reads about startups both here and abroad is about raising money, not about startups that quietly and effectively bootstrapped themselves to
Truth is, this time and energy can be better invested into finding and serving customers. Jeroen Meens, founder of Cynex, who’s been fundraising since he was 21 said to me once: “your best investors are your customers. They give you money and all they want in return is your goods or services, not your company”.
But that’s just a side note: you want to read about getting investment, right? Let’s get back to that. A lot of startups I come across rush far too fast into fundraising, spend much too much time and energy on it, and don’t get very far – mostly because they don’t know enough about investors and investment, and start fundraising at the wrong moment.
A lot of startups don’t realize that investors aren’t philanthropists, and nor are they gamblers. They make calculated risks based on what they know about your market, on you and your team, and on the evidence of your investment and success to date. Here’s a very telling presentation shared by very senior VCs of Capricorn and Newion Investments http://www.slideshare.net/westartup/insight-into-the-mind-of-a-venture-capitalist – good reading, I strongly recommend it.
So with that in mind, how do you recognize when it’s the Good Time to raise funds for your company? Check if all three of these conditions apply.
1. The Good Time
You’ve got a team. It’s an often-discussed fact, but it is well worth repeating it again: investors very seldom put money into a “lone gunman”. But show them a balanced team and the doors open up (not the pockets yet). For a digital startup, a minimal team is a combination of product development/web development and business development/marketing skills, but it depends a lot on what your startup is doing. Of course there are exceptions, but they are few and far between – so if you’re alone, it’s not the Good Time yet.
You’ve got actual proof of progress. Nothing works better than happy (paying) customers: a website that works, that attracts traffic (more than just your friends!) and that converts traffic into Euros.
Just launched? Not quite there yet? Well, it’s not the Good Time then. You’re ready to grow fast (not just grow…). Investors want to see 10 times the money they’ve put in coming back to them in two years. They will tell you of course that they are prepared to live with less, but that’s the number that’s close to their hearts, and they always look forlornly at the results like 312 times return on investment of Andreessen Horowitz into Instagram.
So you’ve got to show them your ambition, and show that you have thought about how you will make your ambition happen. No desire or no plans to grow? Then it’s definitely not the Good Time yet.
2. The Bad Time
The Bad Time to raise money is when you’re not ready. How do you know if it’s the Bad Time? Well, check if any of these two conditions describe your startup.
Do you know the foundation of your business? The proverbial “business model” – do you understand how your product will create value for your customers, and how you will make money on it? And not just enough money to pay your salary for a few years (remember, investors aren’t philanthropists… 10 times their investment is what they are after!)…
If you can’t give a credible summary of your business model in one minute or less, it’s a Bad Time. If you can’t explain other key components of the business model (how big and is your market big and how fast is it growing, how you will differentiate from competition, etc. etc. etc.) in five minutes… it’s definitely a Bad Time.
Have you proven your commitment to your business yet? As a business angel I know well said once, “I want to see the entrepreneur bleed”. Well, not literally of course – but he needs to see real proof of your commitment to the business before he puts money into it.
Giving up the day job to focus on your startup, raising money from Friends, Family and Fools or spending a serious amount of time on building a functional prototype – these prove your conviction and preparedness to work your ass off to make sure the investor’s money isn’t wasted. If you haven’t invested yourself into your project, why would an investor?
So, if you haven’t put a penny of your own money into it, if you haven’t worked up anything beyond a vague PowerPoint yet – it’s the Bad Time.
3. The Ugly Time
How do you know if it’s the Ugly Time? Oh, that one’s easy. It’s when you’ve run out of money. It’s when your team needs to be paid, and there’s no other source of money left but your private credit card. This is the desperate, ugly moment – and this is when people get burned out, and really, really unfortunate decisions get made. This happens to the best of us entrepreneurs, and the only good way to deal with the situation is to not find yourself in it.
Conventional wisdom in the US says that a good (growth-minded) startup CEO should be always fundraising – and conventional wisdom is not wrong.
There are of course exceptions – thanks for the link Frederik Tibau - but for the rest this statement holds true. Roberto Goizueta, CEO of The Coca-Cola Company from 1980 to 1997, used to say: “I sleep like a baby. I wake up in the middle of the night and cry for more money”. Of course, he also made sure it was Good Time to raise money[Photo: Christopher Carvi, Flickr]
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