I’m often asked by entrepreneurs, “When is the best time to raise money?” The answer is as old as time: the best time to raise money is when you don’t need it. You see when you don’t need cash, people come out of the walls eager to lavish it on you, and therefore it is less expensive to obtain. Then I take my tongue from my cheek and give a more thoughtful answer.
The more progress you make with your company, the less risk an investor assumes when investing. The further along you can lead the company, the lower your company’s risk profile, which translates to higher valuation and less dilution. Investors love to put money to work in a company that is using cash to ramp up sales & marketing. If your company has a working product, paying customers, a model that is proven and working so that an investment in sales and marketing will result in a huge growth in revenues and profits….. that sounds highly fundable. Investing in a company with R&D risk is less attractive.
So, the answer to when is better asked after addressing how far you can take your company without the need for outside funding. The further along you take your company the less company you will share with investors. On the pesky other hand, that is always making things more confusing; if money can make you bigger, faster better, then a smaller slice of a bigger pie may be better for your goals.
On which of the hypothetical companies would you prefer to roll the dice and make an investment based on their proposed use of proceeds pie charts?
One caveat: if your company has an actual world-changing, patented technology and you can prove the viability of this innovation, investors may be willing to invest in furthering your R&D. For example, if you invented something that is equivalent to the Transistor.
Invented in 1947 by John Bardeen, Walter Brattain, and William Shockley at Bell Labs, the transistor is a semiconductor device that can amplify or switch electronic signals. It is the fundamental building block of all modern electronic devices, including computers, smartphones, and TVs. The transistor revolutionized the electronics industry, making it possible to create smaller, more powerful, and more efficient devices.
While many founders believe they’ve developed something as huge as the transistor or sliced bread… I’d ask you to think again… you haven’t.
Or maybe you have. Want to talk about funding strategy or general business strategy? I’m a business coach with experience raising capital, investing, and running venture-funded companies. Let’s have a complimentary coaching call by scheduling a Zoom meeting here.