There are a lot of reasons why your startup might have trouble raising money. But in my experience, most of those problems are self-inflicted and can be avoided.
I’ve done almost every combination of funding path you can imagine — I’ve done pure self-funding all the way…
Not only will you increase your odds of getting the money, but you’re going to get better terms. Every time.
What’s more, when I say “raise money,” I don’t just mean putting together the ubiquitous pitch deck and knocking on the digital doors of venture capital firms. I also mean angel investment, friends and family investment, even handing out equity options to co-founders and early employees.
So here are four times a startup tries to raise money too early, and how waiting will increase your odds of getting the funding you actually need.
Raise to Build the Product
If you raise money before your idea becomes reality as a fully-formed product, you’re setting yourself up to be diluted into owning almost nothing at the end. But there’s another sneaky reason to hold off raising at this point, one that most entrepreneurs miss.
It’s always preferable to hang onto 100 percent control of the idea until it’s fully formed and in an executable state on the market.
Everyone involved is going to have ideas for how to make your product and your startup better — from the General Partner at the VC firm to your grandmother. And no matter where the money comes from or how soft the pressure is, that pressure will influence you.
Sure, maybe they know better. But wait to let them give you their opinions — and they are all just opinions — until your product is generating results you can weigh those opinions against. Otherwise, you’re just arguing your experience against theirs, and guess who has more? Probably them.
Especially grandma. She’s seen things.
Raise to Get to Revenue
There are general business cycles during which the pre-revenue stage is by far the most popular stage for entrepreneurs to successfully raise money. These cycles are called “bubbles,” and they don’t end well.
Raising money pre-revenue sets outsized expectations for the scope and the breadth of the startup’s offering. It will often force the startup to spend dumb money on dumb things that don’t directly impact the bottom line.
Raising money to make money runs along the same line of bad advice as “dress for the job you want, not the job you have.” I mean, I get it, but doing that doesn’t actually increase your chances of getting the job you want. Your results do.
So keep your powder dry. By that I mean your startup should only spend money when you absolutely need to until revenue becomes a source of funding.
This will not only force you to create a lean and scalable solution instead of a pricey and bloated one, it will also allow for better terms when you do raise money because you’ll have a track record and proof of potential product-market fit.
Raise to Get Profitable
This is before you refine your offering and optimize your company — when you’re operating either at a loss or with margins that won’t allow your startup to scale until you can trim the fat and automate the repetitive. It usually takes money to get this done.
However, once your startup has outside funding, the pressure to increase the top line gets ratcheted up by those outside investors. The most common trap I see at this stage is when founders accept investment to scale and then end up just using that money to expand market share with all that bloat still on board and none of that automation built.
Hold off on stepping on the growth accelerator until you have a clear plan to cut costs and increase margins. When you do go to raise, show investors that plan, and make sure they’re on board with your plan, not a market-share land grab.
Raise to Get to Scale
A startup should only raise money for one purpose: To sell more and better products to an ever-growing customer base. Too many startups look at raising money as a means to hire engineers to figure out the “better” part of the equation and hire marketers and salespeople to figure out the “more.”
Instead, get the more and better part figured out first, and hire those resources to execute.
Go into fundraising with a one-year and three-year product roadmap and sales strategy. Your roadmap should draw a clear path to a product that produces more results for more use cases and lower costs. Your sales strategy should identify multiple paths to multiple markets and the resources and effort needed to fill those sales pipelines.
And if you really want to impress investors, have a CTO and a CRO already hired or at least identified.
In the Meantime, Build Relationships
You don’t have to have your entire billion-dollar end game mapped out before you make your first investor pitch. In fact, you should be networking and connecting to investors long before you’ve made any progress.
When you build those investor relationships over time, and you show them progress and traction along the way, raising money becomes almost a foregone conclusion, not a random shot in the dark.
Guest post by: Joe Procopio. Joe is the Chief Product Officer at GetSpiffy and the founder of Teaching Startup. He is also a featured startup and innovation columnist for Inc. Magazine and Built-In. This post was originally published in Medium and is reproduced with the author’s permission.
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