Although the right time to raise funding should be very early on from when you start your business, the time when you should look to seek funding needs to be very carefully thought about as there are many risks involved in mistiming this very important call.
The most obvious risk of seeking funding too late is that the business will run out of money and be unable to continue operations, or at best, will have to cut back and slow growth to preserve cash until additional funding is obtained. Going too late has other effects which could cripple the company longer term such as the effect running out of money (or coming close to it) would have on the morale of the team whose salary you may be having to sacrifice or delay.
There will also be an impact with your suppliers and customers who will notice the effect on payments or on product/service quality. The credibility of the senior management team will also come into question as the management team has let its business come so close to the edge (and in some unfortunate instances, over it!).
However, seeking funding early for a startup can be equally dangerous for entrepreneurs. Getting investment onboard before the business or before the founding team is ready, leaves the startup exposed to investors of all types.
The practical issues here is that your business may not be as commercially viable as it could be, which may lead investors to undervalue your business. The implication of this is that for the same amount of investment, the investor will take more equity, benefiting from a lower valuation. So how do you know when the right time to raise funding is?
Getting the business to have proven as much as it can independently will result in the business attracting a higher valuation. At the very least, having proven the core business idea to illustrate that the business is a viavble commercial proposition is essential. Having customers and early revenues is also a good start.
It will be critical that you have a definable growth strategy for your business. This should address some key questions such as; how do you segment your customers; which customers will you approach first; how will you determine pricing; what margins are right for you to make in your market; at what rate will you grow your team; how will you keep up with changes in technology; how will you differentiate yourself from the competition; where will you be in three to five years time?
The business plan you put together will address some of these questions but it is important for you to think these questions through before seeking funding as investors will want to know you have a vision and a goal for the business that is realistic.
It is extremely important that you have a complete or near-complete senior team and core operational team in place before seeking investment. Investors take confidence in the people they are backing, as the team you put together are those who are expected to grow the business and deliver value for all. Missing a CTO or not having a clear CEO in the business will not inspire investors with confidence. Equally, not having a plan for key operational roles (developers / designers) in place will also raise concerns.
Of course, investors will not expect that you have a full team already in place and some of the funding you are looking to raise will be used to recruit the team your startup needs. But having some of the important roles filled and having a plan of who else is needed in the team is absolutely critical. Equally, it will be important that you do not have too large a team who cannot justify their positions as investors will not want to pay for fat in the business and will not want equity to be distributed haphazardly across the shareholder base.
Image credit: CC by Roy Niswanger