The questions I hear most often from founders and entreprenuers are:
1. When to raise funds ?
2. How do I find the right investor(s) ?
I'm sure there have been much written about both topics - but in general, the more an entrepreneur can bootstrap the company to at least show a proof of concept or even better a working prototype, along with a well thought out business plan, the higher the possibility of getting funds, possibly from more qualified investors. Sometimes, outside fundraising might not even be necessary and the company can be bootstrapped - but most often some capital infusion is needed for scale.
There's nothing preventing founders from raising capital with nothing but just brilliant resumes and glowing records of past experience, but it just doesn't come close to approaching potential investors with an actual demonstration of the idea or concept.
I would encourage potential entrepreneurs to wait as long as possible before raising capital. Even more important, have a plan of action and time-frame as to how to best leverage that capital to scale the business when funds are raised. Choose investors who thoroughly understand the underlying business, have great, related contacts, think highly enough of the concept to actually suggest some constructive ideas when presented with your business plan and demo.
Think carefully if the situation is truly mutually beneficial. Do the investors add value and in return get decent terms to compensate for the risks they're taking ? Will these investors really play an active role and contribute to the success of your company ?
The market dynamics always work in favor of the best prepared: the investors with the best track record who have cultivated the strongest relationships with their companies and contacts will attract a premium while founders that manage to combine a great idea with a solid team and articulate business plan will be able to dictate stronger terms from investors.
While these points might be painfully obvious, most people that start companies initially get lost in the excitement of their idea or product itself and neglect the importance of:
- building out their teams (or identifying potential hires) with complimentary skills and with the ability to get things done (on time).
- writing a business plan (even if an outline) with actionable milestones, a defensible differentiation strategy, a revenue or business model (ie how will this venture produce revenues) and how to fend off potential competitors [remember you will have to face these issues regardless of whether to raise capital or not, so you better have solid answers for them]
Next comes the questions of how to best raise the funds - ie what are some common instruments used in early stage funding and how to approach negotiating terms with potential investors. More on that in the next post...
In the meantime, I would highly encourage everyone interested in this topic to read the great blogpost yesterday by Charles Moldow on "Are you sure you want our money ?"
Let me know your feedback.
This was one of the key questions we had to address in a panel during last week's Red Herring 100 Conference in San Jose. While it's not an easy question to answer, the reply simply isn't just "when you need money". In fact, being contrarian is a good strategy when it comes to fund-raising. For example, Fund-raising in emergency mode only exacerbates the negotiation position.
as well.
