To fund-raise or not to fund-raise. That’s the question all founders have to face at one point in the life-cycle of their business.
And in an era when access to capital has never been easier, the road to success has never been rockier. And it’s still one of the most stressful experiences any founder can go through.
Whether it is raising too much money, or raising from the wrong people, the simple act of fund-raising causing the downfall of many a young business.
Here are a few questions you should be asking yourself when you make the decision to give up lumps of your hard earned equity.
Do I really need this money?
One of the biggest mistakes that start-ups make is raising money for the sake of it, or raising more money than you need. A lot of founders forget to ask themselves the question if they really need to raise this money?
The key thing to remember is that you are giving up part of your equity in the business in exchange for this funding, so it needs to be essential to the growth of the business that you do so.
Also bear in mind that investors are looking for a return, which means once you take their money, the expectation will be that the cash will be spent on increasing the value of their investment. If you aren’t confident that you can make the investment worth their while, then you could find yourself in a bit of trouble down the road.
Finally – and most important – is to ask yourself how much money you NEED and not how much you WANT or how much is on OFFER. Having a big investment with a long runway can be nice, but it means you’ve given up a larger chunk of the business from the get go, and if you achieve that valuation growth with money to spare, you’ve given up more than you needed to.
What will this money allow you to do that you couldn’t do without it?
Analysing your business model, spending and cash burn is an integral part of raising money, so the question of what to do with the money should be a moot one.
However, you’d be surprised at quite how much “sticking a finger in the air” is used when arriving at spending estimates, which can lead to trouble down the line when your rough calculations turn out not to be as robust as you thought.
Having a cool office should not be the top of the list, but realistic expansion of development, operational and marketing activities should be the focus.
So when you are modelling your financial projections, ask yourself exactly what the money will be spent on that is essential for the growth of the business. If you can’t account for (in reasonable) detail, most of the dollars you are pitching for, then you may well be raising more money than you actually need. That leads onto a key question.
How much runway will the money buy you?
When they pitch, every founder estimates how long they have before the cash they raise runs out, and where they plan to be by the time they need to raise money again.
It’s a delicate balancing act, as having too much rope can often lead one to hang oneself. If you know you don’t have to deliver results for 30 months, the pressure of immediate growth off, and it’s harder to maintain a sense of urgency.
When you leave yourself a long window, you also leave yourself more open to the fluctuations in the business that might affect your valuation. If you achieve exponential growth in 12 months, you would be in a better position to raise more money at a better valuation than you did when raising enough for 24 months a year previously.
But if you leave yourself short – say only 12 months – then you put yourself under enormous pressure for everything you try to work. And not only is there no room for error, you also only effectively have six months before you have to think about going through the exhausting process of raising money again.
While there is no perfect benchmark for how much time you should buy yourself with your funding round, its generally accepted that 18 months is a good window as it allows you more than 12 months to start to achieve the growth needed to keep the company valuation on an upward curve.
What kind of investors do I want?
Once you’ve negotiated the minefields of deciding how much you need, what it will be spent on and how long it will last, you must also ask yourself “who should I be looking to invest in me?”
As mentioned previously, raising money has never been easier and there are countless angel investors, venture capital and private equity funds willing to put money into great ideas.
But not all money is created equal, and you have to decide whether you are trying to raise money with autonomy or whether you want a mixture of both cash and strategic advice.
It’s all too tempting to go for the option that gives you the easiest path to control. That might be okay for a serial entrepreneur who has been there and done it on various occasions, but for a newer start-up founder it might be more advisable to look for funding partners who can help you with introductions, market strategy and business advice at the same time.
The final question to bear in mind is whether you want to raise money from one source or spread your bets amongst multiple investors. Both approaches have pros and cons.
If you plump for one investor, your relationship could blossom and you could take on the world together, but there is also a risk of your sole investor trying to have more of a say and a greater risk of your business closing down should the relationship sour. If you opt for multiple investors, you will probably have more control as your shareholders will be more diluted but you will undoubtedly have to work harder to keep them happy.
Whoever said this was easy?
Also read about why the much-maligned Generation Z should be the target for any new entrepreneur.
Adam Flinter is managing partner at Golden Equator Consulting, a company which helps start-ups, SMEs and mid-stage businesses with their strategy and growth.