Raising capital for your startup is not a simple process. For this reason, it is important to pick the right time to get started. Your startup likely needed money from the outset, and nothing has changed. You may need to lodge a patent application, hire a new developer, or pay wages or rent. Maybe your startup is ready for its next big milestone, but is it ready to raise capital? Below, we’ll explore some key things to consider before you raise capital and what you can expect along the journey.
Have You Considered Bootstrapping?
Firstly, you should consider bootstrapping your startup if you are in a position to do so. If your startup is growing well with the revenue it’s generating from your customers or clients, and this is sustainable, then getting cash into the business from external investors (who will dilute your equity stake) may not make sense.
Your startup shouldn’t raise capital just because it’s a startup. It should do so to increase its value and project its growth. Consider bootstrapping for as long as you can, and if you do eventually invite an investor onboard, you’ll be doing so when you’ve gained traction and have a higher valuation. At this stage, you should be able to show your market position, returning clients, and most importantly, growth. You will have a clearer business model and be in a better position to sell your idea and convince an investor that they can expect a good return on their investment.
Do You Know How Much Money You Need?
Before raising capital, it’s a good idea to build a basic financial model for your startup which will map out how much cash you will need to get you to your next business milestone, and how much for the one after that, and so on. Build this financial model to help understand both the short term and long term capital needs of your business but don’t feel bound by it. Ultimately, have a plan for profitability and determine how much cash you will need to get you there.
Are You Ready to Sell Your Business?
There are also non-financial considerations for choosing the right time to raise capital. Firstly, do you have the time to devote to capital raising? You will need to commit yourself fully, so it is important to make sure that your commitment won’t be at the expense of growth and other breakthroughs for your business.
Next, have you built connections within the startup space? You may not know any investors personally, but do you know a successful founder who might give you an introduction? Going into a capital raise cold is extremely difficult. Build connections to facilitate warm introductions and start the process on the right foot.
What is Standard?
Lots of startups follow a similar pattern when structuring their raise. That isn’t to say you must do so as well, but it is helpful to know how rounds are commonly structured and what terms such as ‘seed’ and ‘series A’ mean.
|Family and Friends||Typically, the first place a startup looks when raising capital is close to home. Obviously, this is not suitable for everyone, but having friends and family invest in your startup early is quite common. Bear in mind that your friends and family are not professional investors – make sure that they are getting a fair deal.|
|Seed Round||Your seed round investors will be angel investors. An angel investor is someone who invests smaller amounts of capital into a range of startups, expecting many to fail but one or two to do well. A great way to meet angel investors is through networking, but you can also consider approaching angel groups such as Sydney Angels or Melbourne Angels. Typically, you will raise this round through equity or a convertible note structure.|
|Series A||If your startup has come out of its seed round and is continuing to grow, it might be the right time to up the ante and approach a venture capital fund to lead a Series A round. This round should occur in conjunction with the development of a robust business plan with a focus on an ultimate path to profitability and return on investment.|
|Series B and beyond||Subsequent rounds like series B and C occur when your business has moved beyond the development phase and is ready to expand substantially (commonly internationally). Often, it will involve existing investors injecting more capital into the business. Remember that the number of rounds your startup raises is not a measure of your success!|
When to raise capital is something very specific to your startup. In some cases, it won’t make sense, and in others, it could be the key to supercharging your success. You should only raise funds if you need to and ensure that you have the time to devote to the process. Speak to founders about their experiences and, if a raise is on the cards, start building connections now.