When should a startup raise money?
Well, quite simple — you raise funding when you need it the most, right? Wrong.
Beggars can’t be choosers.
First of all, a desperate need of a cash injection is usually a turn-off for investors, both angels and VCs. Secondly, even if you manage to spark some investor interest, chances are that the investment terms won’t be exactly in your favor, having in mind your bargaining power at such a moment.
“Our startup needs an investment of $300K which is going to cover our costs for the next 12 months.” It doesn’t really sound attractive, does it? Let’s try this one more time. “Our startup is going to reach X amount of users, $Y in revenues in the next 12 months and an experienced investor on board is going to significantly speed up the process.” Don’t sell, make them want to buy.
Pre-product vs. Traction
Understanding the startup’s stage at the moment of fundraising is fundamental. Pre-product startups are basically judged on their business potential — market size, competition, revenue model and team are some of the decisive factors in no set order. Use them in your advantage instead of saying “our product will be live next month.” In such case, 10 out of 10 investors are going to wait until your product is live. It drastically mitigates their investment risk as traction is much easier to quantify than forecast is.
Traction is all about your key performance indicators. The key is knowing what to measure as no investor would be interested in the amount of cold emails you send. Perhaps the handiest of all would be the popular AARRR or so-called Pirate metrics, introduced by Dave McLure: Acquisition, Activation, Retention, Referral and Revenue in that order. Those can be very well complimented by other metrics such as Customer Acquisition Cost, Churn and Lifetime Value of a customer. Your metrics should tell a story interesting enough for investors to keep listening.
Building the right product is hard. Finding product-market fit and gaining traction — even more so. Plan ahead as raising funds regardless of their source can take even up to 9 months until a deal is finalized. The process can also be very strenuous, overwhelming and may even feel like a full-time job, distracting a founder from his main focus — the product. If you don’t have the time or the skills to run it, get help from outside. A funding round needs to provide a runway long enough for 12 to 18 months.
The right amount at the right time
We often get enquiries from startups with a figure in mind that fit their imaginatory valuation and their near-term funding needs. When they find out certain investors only invest tickets much larger than their desired amount, they revert with: “We can easily adapt our budget to 2.5x the initial investment needs.” What they are often missing is certain metrics are required before justifying a higher valuation. It is important to time your funding with the level of maturity of your business.
Funding does not equal success
No, it doesn’t. Simply a means to an end. It validates that somebody is naive enough to invest in your company. Before you start fundraising, ask yourself if this is the right moment to do it and explore all the possibilities. Apart from angels and VCs there are various alternative methods to finance your startup early on. Stay focused on the product at all times. You managed to raise funding already? Great, get back to work.