So, you've got this amazing idea for a business, but you don’t know how to raise the money needed to grow it. Even if you decide you want external funding, many questions can come to mind for first-time entrepreneurs. When should you start approaching investors? And who are the right investors for your business? Don't worry! We're diving into the world of fundraising and taking you with us in a series of articles that highlight the Wellstreet perspective. This piece will cover when to consider raising money, how much and what type of capital. Who would be the perfect investor for you - and is that a VC? So grab a coffee (or your beverage of choice) and dive in!
WHEN TO RAISE?
When it comes to raising funds, timing is everything. Entrepreneurs often find themselves stuck between deciding when to kickstart their fundraising journey. At the moment, founders and managers must consider the balance between adapting their business model to dodge immediate capital needs against the backdrop of the current economic situation. In that sense, it's crucial to:
- Assess how to manage cash flow and runway expectations,
- Strive to find early signs of product-market fit (PMF) as soon as possible,
- Focus on potential monetisation strategies.
While waiting for the perfect moment might seem like a good idea, it's important to remember that the fundraising process usually takes much longer than expected—often about a year before you see any capital infusion. So, entrepreneurs, we advise you to weigh your options carefully: whether to go for fundraising now or hold off for a while.
HOW MUCH TO RAISE?
Once the decision to seek investment is made, entrepreneurs face the challenge of figuring out how much to raise. Investors often suggest starting with a smaller investment and then scaling up based on hitting certain milestones. This approach not only protects your ownership in the company but also keeps your ambition and growth in check. It's a fine line to walk—you don't want to hold back your growth by not raising enough, but you also don't want to dilute your ownership by raising too much. So, it's all about finding that balance and staying committed to your growth vision while protecting your stake in the company.
WHAT TO RAISE?
Furthermore, it's essential to consider the type of capital that best fits your business. Whether it's venture capital (VC) or loans, you must ensure the type aligns with your goals. VC funding comes with a lot of resources but also an expectation of an exit in a determined amount of time, which might not suit every business. On the other hand, family offices and angel investors often offer more patient capital, allowing for longer-term strategies. Exploring different options like loans, grants, or even tweaking your business model to generate higher revenue opens up more possibilities. Each option has its own risks and rewards, so it's important to approach fundraising with a strategic mindset.
FROM WHO?
Finding the right investor for your venture is critical. Beyond just providing money, you must also consider what else they bring to the table, be it valuable expertise, connections or guidance. It's like finding a partner who's been through similar experiences and is willing to share their knowledge and support. Keeping an eye out for VC firms with capital to deploy and understanding their investment thesis can also make the process smoother. By finding partners who align with your goals and values, you can navigate the fundraising journey with confidence and clarity.
WHEN COULD VC BE A GOOD FIT?
VC funding could be a suitable option for entrepreneurs under specific circumstances. Here is a good checklist to help you determine whether VC funding is an appropriate fit for your journey:
You want to:
- Invest in development or expansion
- Raise capital to outcompete the market and build a valuable company
- Have professional investors who can help you in more ways than providing capital
You are okay with:
- Committing your foreseeable future to build your company, which is not a side hustle
- Having external owners in your company who will make demands, have opinions and require you to set targets and do your best to reach them
You need to:
- Usually, demonstrate PMF
- Have a scalable business model and an execution plan
- Proof of your current traction
In conclusion, embarking on the fundraising journey can seem daunting for first-time entrepreneurs, but fear not! Remember, timing is crucial, and it's essential to strike a balance between ambition and practicality. Whether it's venture capital, loans, or alternative funding sources, aligning with partners who share your vision is essential. Navigating a fundraising journey can be challenging, but with knowledge and determination, you are more likely to succeed in your quest. Read our next article, Essential Tips to Prepare for a Fundraising Round, to learn more.
