To seek funding or not seek funding — that is the question that sits on the chest of almost every entrepreneur. I’ve struggled with this decision for almost my entire career. I see so many startups raising millions for projects that haven’t even hit a beta stage yet. I think to myself, “If I just raised that kind of money, it wouldn’t be so stressful spending my own money for things like client acquisition, feature development, and marketing. Like a shot in the arm, I know it’ll hurt for a second but it might be ultimately beneficial to my well being and the well being of the company. But is all of that true? Is it as cut and dry as it seems? Is raising money the first thing you should do… or the absolute last thing you should do? Do you want other people telling you what to do with your baby? Are you willing to give up a huge chunk of equity? There are some definite pros and cons of raising money for your startup. And the most important thing you can do is list each of those pros and cons out on paper and then ensure you’re willing to live with what you’ve come up with before pulling the trigger.
While a billion dollar valuation and subsequent buyout might be the dream for some founders, there are a few factors to consider before deciding if (and what kind of) capital is right for your company’s growth and future.
Why Raise Money For A Startup
Every company’s needs and goals are different, but the need to invest in a range of services and equipment is a given if you’re looking to grow your startup. According to Y Combinator, most companies will need to seek outside capital to fuel growth (known as seed funding or capital). By definition, the point of a startup is accelerated growth, which typically requires additional investment from outside sources. Before getting started, founders should answer a few basic questions.
For instance, are you truly a startup (not every new company is — or has to be — a startup, and that’s okay. (Pro tip: if you’re a high-growth company that will require a significant amount of outside capital to operate and iterate your product or service, you’re probably a startup.)
So you’re a startup — great! There is no shortage of investors eager to find and fund the next Google/Facebook/Slack/Airbnb/insert-genius-life changing-idea. But deciding to raise outside funding for your startup is the easy part. Instead, knowing when to actually do it and getting the timing right can make all the difference in how successful your fundraising turns out. You may be confident and totally sure in the worth of your idea, its potential to blow up the world, and your team’s ability to execute it beyond the growth stage, but you don’t have to convince yourself — you have to convince investors.
Unless you’ve got a way to fund your idea yourself, then the general consensus is that you should start raising money as soon as you can, but not before you can make a compelling case to investors. A great story (and the ability to tell it) goes a long way, but investors will also look for answers to practical questions before they consider writing you a check:
- Is there a market for your service or product?
- Is it scalable?
- Who is your customer/user and what is the adoption rate for what you’re offering?
- Do you have a finished product/service/prototype?
- Can you prove that you’ve achieved product market fit?
- Who are your competitors?
- How are the investors going to get their money back?
- What are your current revenues or user adoption rates? Investors want to either see revenue or massive user adoption with a good monetization strategy.
- Are the founders and their teams… actually cool people?
There are also basic operational factors to take into consideration. The living room/kitchen/coffee shop/garage origin story makes for a great biography, but eventually, every startup needs to grow up and get down to business. Are you ready and capable of hiring key staff, renting office space, launching a successful marketing and PR operation, and getting the right software and technology in place? Every startup’s path to raising seed capital is different, and, in rare cases, the idea and the dream will be enough to sell it. However, this is not common. Raising capital is a serious step, and founders will need to prove that they are up for the challenges and risks associated with building a real company.
The Pros and Cons of Raising Money
While raising capital will get you the money you need to build your company and reach profitability, it will also require that you give up a certain percentage of your company, which can range anywhere from between 10 percent to 25 percent in most cases. And, of course, because it is not actually Monopoly money, you will not only have to give up a stake in your company, but will also have to meet deliverables and milestones set forth by the investors, especially if you anticipate going through several funding rounds, which many companies usually do. As much as the investors have a series of attributes they’re looking for in their future investments, a founder should also be very picky about who they take on as venture partners. Ask yourself a few important questions:
- Is this investor someone I’d actually want to work with?
- Do other founders that have worked with this investor tell horror stories or stories of happiness and success through working with their VC firm?
- How much control do I need to give up?
- How much equity do they want?
- How involved are they going to be in the company? Are they going to be dropping by daily and barking unrealistic and ignorant demands?
- Do they have a good track record in my industry?
A good investor could change your life and help make your dreams come true. A bad investor could ruin your life and make you wish you’d never been born. Choose your investors like you’d choose your spouse. Choose wisely!Choose your investors like you'd choose your spouse Click To Tweet
Know When to Hold ‘Em and When to Walk Away
Someone wants to give you money! Sunshine and roses all around, right? Maybe. But maybe not. Getting the right kind of investor for your startup is just as much or more important as getting funding in the first place. Like any personal and professional relationship, not everyone will be a good fit. You’re giving up ownership and control in your company, and you want to make sure that your investors’ goals, values, reputation and track record match up with your own.
Looking for funding can be a hit-and-miss process, and it is also usually long, drawn out, stressful and tedious. Sure, maybe you’ll be the one unicorn or rock star that gets flown out to Silicon Valley on private jets to pick up suitcases full of cash no questions asked, but just in case you’re not, you need to be prepared to dig in and do some heavy lifting. Forbes recommends six steps to get you started.