Ready to get your business off the ground? Then you’re going to need to raise capital. But what’s it worth to you? Turning down money seems counterproductive, but most funds won’t come freely. With equity funding, investors will often be throwing in their two cents on business matters along with their fair share. That’s one of many reasons why securing startup funding at the most necessary time for your business is crucial. After all, long-term success and strategic timing often go hand in hand.
Equity financing can come from a wide variety of sources, and some will require less in return. So keep your options open and hold out for a perfect fit. The reality is, capital sometimes comes with unavoidably hefty strings. Many times, if an offer seems too good to be true, you might be letting go of more than it’s worth.
With the fate of your company in mind, there’s no time like the present to assess your goals and needs honestly. When it comes to raising money, decide what you’ll need before you go out and start asking for it. First and foremost, ask yourself, how much are you willing to give up to get started?
Let’s take a minute to figure that out. Long before you sign on any dotted lines, here are some significant factors you need to weigh.
What is your company currently worth? When securing the best investors, presentation is often everything, but that part comes later. Before making a single move towards fundraising, you should examine your assets and position extensively. From there, you’ll be able to start building up your company’s value from where you’re really at.
Aim to maximize your worth as much as you can with what means you have. In the process, be sure to exhaust all available resources outside of investors before you cross that sometimes treacherous bridge. For instance, there are various government-based organizations focused on helping startups. I’d advise looking into those pronto.
Building value will include a variety of steps. You’ll need to do things like developing a client base, obtaining testimonials, and learning from your competitor’s valuations when possible. The question going in should be: have you done everything within your power to maximize your positioning and leverage? Think carefully about these things before you jump the gun.
Have you gotten an expert value forecast or a 409A valuation before seeking out investors? Successful entrepreneurs tend to say you should. If the answer is “yes” to all of these questions, you might be ready to hit the ground running. But again, be thorough first. To start on the right foot, you must know where you stand before pitching.
You don’t want to give up more than you stand to gain. So when it comes to equity, you need to establish how much you’re willing to lose going in. As noted by Forbes, “the rule of thumb for seed-stage rounds is 10% to 20% of the equity in the company, and then equate that to the next 18-month fund requirement.”
What Will You Use it For?
Ask anyone who’s been in your shoes, and they’ll agree. Before fundraising, one of the most important factors to consider is what you’ll use it for. Seasoned entrepreneurs say the most reliable and “right” way to evaluate your needs is through your “use of proceeds”. Simply put, create a proper analysis of your cash needs and allocations. You should assess the numbers over a specific period of time (usually 24 months) to map out and meet all goals.
At some point, you’ll need to make “a use of proceeds statements” for investors to look over. It will specifically show interested parties how and where you plan to spend their invested funds for those less familiar. But before you can have that meeting, you’ll need a clear and calculated sense of what goes where and how much.
How Much Money Will You Need?
Today, there are more investors than ever to choose from, and they’re all promising more and more money. Many are ready and willing (or at the very least claiming) to offer exactly what you’ll need, and then some. But be careful. Any financial expert will tell you that over-raising is worse than under-raising. While under-raising is not ideal, there is always more money out there to be had. Once you’re locked in with investors, you’ve made your equity bed. Whether it was truly the best choice for your business or not won’t change that once the deal is done.
Based on your valuation, figure out if the money you’ll need is more for short-term help (like paying bills) or funding long-term growth. It’s essential to draw the distinction early on for everyone who will be involved.
You’ll want to make sure you are only raising as much as you’ll truly require. Ask yourself: How much will it take to see my well-thought-out strategy through? That’s what you will need, and nothing more. And if you can swing some of it upfront, it’s a route that might be worth consideration.
Can You Self-Fund?
Here’s something to think about. Do you want to give up any control over the direction of your company? How about the operations? My guess is, you don’t. Doing it on your own will be much more challenging. That’s a given. But a self-funded path can also prove well worth it in the end if done right. If you can afford to self-fund, perhaps you should seriously consider it. No matter how tough it might be at first, your vision won’t have to be limited. Typically, working with investors will include working on their time frames and employing agreed-upon strategies that benefit them. So know what’s worth giving up and what isn’t going in.
If you want to do it your way, establish what you can accomplish without outside assistance. And do it while you still have the chance, before anyone else is involved. When still an emerging and evolving business, only work with people you trust if you do include others. But keep that list to a minimum. You must assess your product-market fit in the early stages while you’re still at your most vulnerable. If you can successfully establish this with very little financial help, the better off you’ll be. And the better off your relationships with future investors will be when needed.
If you don’t wish to self-fund, there are plenty of viable options to get your business up and running sooner rather than later. And you don’t necessarily have to go into debt or give away equity to do it. Often, who ultimately lends or donates you the money you need comes down to when you’re going to need it. Some historically quicker options, like family or friends, may require less in return.
How Quickly Will You Need The Money?
So let’s say you’ve decided that you’ll be needing the money. The next question is: how quickly will you need it? Take your time and do the math before answering this question. The timeline and your options should be fully fleshed out. Of course, some investors will take longer than others to put the funds in your pocket. And grants can take even longer in most cases. Because of all the potential waiting, your expectations may have to shift.
Those who know they need the money sooner rather than later may want to consider bank loans, friends, or even family investments first. These often have a much speedier process. Also, friends and family may be willing to invest in your brand-new business on an interest-free basis. And it could be just enough to get you going. If that’s not an option, you might have to make some sacrifices.
When looking at timelines, consider whether or not you’re willing to take on debt and how much. Being able to answer these questions will help you decide how to go about getting what you need. And when it’s the right time to do it.
With all of this in mind, timing is critical to consider. Do you need the money right now? If you start raising money at the wrong time for your business, it could have costly and unforeseen consequences. Don’t rush a process that will have a lasting impact, especially in matters of equity.
When the time comes to pitch to scrutinizing investors, first impressions are often everything. You can rarely go back and do it again. So give it your best shot only when the time feels right. With that said, the only time you should approach investors about raising funds is when it’s crucial for your business’s success. Before you can take that startup step, you’ll need to get all of your ducks in a thoughtfully laid-out row.
In other words, take your time and formulate a foolproof strategy before hitting up investors. The success of your business could very well depend on it.