Many people use their personal savings to start their businesses. Sometimes they take money from friends and family. If things go well, there may come a time when they need to fundraise — to get capital from an outside entity, be it a fund or a bank or an angel investor.
When is that time? Think about fundraising when you reach a point where you want to grow your business faster than your own savings would allow. When you don’t have enough cash to fund your operations, and you are willing to give up some ownership and control of your business (more on that later), it’s time to consider raising outside capital.
When to raise capital
Ideally, you always have 12 to 18 months of runway, which means you have enough cash to run your business and do what you need to do for the next 12 to 18 months. When your runway dips below that level, that’s a good sign you may want to fundraise.
Keep in mind: There is a balance between fundraising too late and too early. If you fundraise too late, then you risk running out of money before you get any funds in your bank, which is a risk you want to avoid. Conversely, if you try to raise too soon, when you don’t yet need the money, then you risk not having enough demonstrable evidence to justify the valuation of your company to investors.
In addition to the 12–18–month rule of thumb, you also want to ensure you can make a compelling case for why anyone should give you money. Have the right proof points about the opportunity or prospect your business offers to get a return on investment. If you’re very early-stage — pre-revenue — you want to show you’ve got traction with the usage of a version of your product, for example, and you can show growth. Or if you already have revenue and customers, you need to have tangible wins — it could be growth in revenue, it could be new partnerships — to show investors to compel them to invest with you.
Why to raise capital
Money is the obvious “why” for fundraising, but there can be other reasons, as well, to take on external investors. Fundraising with the right investor within your industry or with expertise in your area can open the door to new markets or partnerships and accelerate growth. That strategic value is important, as is the freedom you get to potentially achieve your goals more quickly.
“Although money drives your fund-raising effort, it is not the only thing potential financial partners have to offer,” Jeffry Timmons and Dale Sander wrote in Harvard Business Review. “If you overlook considerations such as whether the partner has experience in the industry, contacts with potential suppliers or customers, and a good reputation, you may shortchange yourself.”
How much capital to raise
There’s also a balance between too much and too little when it comes to how much capital to raise. It needs to be looked at from a few different angles. First, how much do cash do you need for the next 12 to 18 months? Answer that question, and it will give you an idea of how much you want to raise. But don’t forget to consider that the amount should include running your business in a way that achieves the milestones you need to set up for the next fundraise in another 12 to 18 months’ time. How much you need to spend in the next 12 to 18 months must be enough to include the activities and investments that will achieve additional wins to increase your value and allow you to fundraise again.
Why don’t you want to raise too much cash? The simple answer is dilution. The value of your own ownership percentage will likely decrease when additional investors are brought on. The company overall may be increasing in value, but you want to make sure your ownership doesn’t get too diluted. Also, if you raise too much at too high a valuation, then it will be difficult to do your next fundraise.
If you have questions about whether raising outside capital is right for you right now, or you need assistance figuring out how to start the fundraising process, please reach out to me. I’m happy to help.