When should you start thinking about raising money?
The first thing you need to figure out is when is the right time to raise – If ever. Not every business needs money and some businesses only need small infusions of capital before they start growing through revenue. There are many examples of billion dollar companies that didn’t fall into the typical VC backed model or they waited a long time before taking outside capital, companies like Mailchimp and Lynda.
Before you think about meeting with investors, ask yourself whether or not you actually need to raise. Figuring out when you “need” money is a very particular decision about the type of company you want to build and how you want to build it. Ask yourself if you need money to fund:
To begin User Acquisition?
Or to Grow?
Fundraising will get easier and easier as you move through these stages because each stage is a demonstration of progress.
Don’t start raising money without knowing what you actually need money for. If you only have an idea with no clear understanding of how you are going to spend money, don’t try to raise it. It’s better to wait until you at least have a prototype to show, because then, you’ll start realizing – “If I had money to do x, y and z, I could expedite my way to the next stage.”
Most founders don’t give enough thought as to how they’ll spend money and this can turn investors off. When you are fundraising, it is important to put yourself in the investor’s shoes. Remember, investors are in this field because they want to make a lot of money. In addition they also want to make sure they are investing in founders that will be smart about how they spend money.
So what do founders raise money for?
Here are some of the most common asks for money:
Hiring. Be careful with this one. A lot of founders often resort to this category as an easy way to excuse why they need funding. But hiring too fast and too many people can actually be the single most effective way to kill a startup. The best startups we’ve worked with manage to do more with less and use technology to offset the need to add overhead for as long as they possibly can. Unless you are on the growth stage, hiring a large team is not ideal. Don’t be one of those founders who loves to talk about how many employees they have. Those founders often confuse growth with having a large team. Before you ask for money to hire people, think very carefully about whether or not hiring is an actual roadblock to reaching your next milestone.
User Acquisition. If you need to pay money to acquire customers at the very early stages of your company, you haven’t built a great product. Although spending money on google ads or Facebook can potentially lead to some traction, that traction can be deceiving. A lot of founders, specially first-time founders, who take this approach, can’t recognize whether or not they are acquiring customers profitably. Yes, at some point you will have to pay to attract users, but in the early stages of your company, you want to make money before you spend money on user acquisition. Grow in a way that builds brand equity, by getting people organically. Deliver such a great product and service that early adopters can’t help but tell their friends and family about your startup. Who knows, you may start growing so quickly, you don’t need to raise money!
Customer Service. If you need to raise money because you’ve reached a point where you have so many customers you can’t keep up, they're getting angry, or waiting for you to get back to them, BINGO!, that's a great reason to raise money. At this point, raising money is a no brainer because investors understand that not having enough people to deliver a great customer experience can be an impediment to growth.
We warn founders to avoid raising capital before they are ready simply because the earlier you raise money, the more diluted that capital is. The earlier investors come in, the better deal they are going to want because they are taking a lot of risk betting on you when you have little to show. Every dollar raised is more of your equity being given away. You don’t want to do that if you don't have to.