Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.
The most obvious factor to consider when deciding when to raise money for your startup is your runway. Your company’s runway is the number of months of cash you have left in the bank, assuming your current income and expenses stay constant. As much as it’s great to be idealistic about timing a funding round, there are some real limitations posed by your company’s runway.
You should be aware of events or milestones happening during your fundraise that might help to create a sense of urgency around your round.
You need to raise money before you reach the end of your runway, or else you’ll be out of money. When timing a fundraise, a common rule of thumb is to leave at least six months between when you plan to start fundraising and when you expect to reach the end of your runway. The fundraising process can take six months, and the closer you are to the end of your runway when you hit the fundraising trail, the less negotiating power you will have. Investors will know you have no other options.
If your company is profitable, you have an indefinite runway and running out of money doesn’t have to factor into your fundraise, giving you more negotiating power. If you don’t have six months runway left, you’re in what Y Combinator Founding Partner Paul Graham calls “the Fatal Pinch.” Your options are to decrease your costs or increase your revenue. If increasing your revenue is an option, do this first. If not, cutting back on costs, likely by letting go of employees, is your only option. If you find yourself in this situation, realize you are here — make changes to extend your runways, and then turn your attention back to fundraising.
But of course, a lot more should go into deciding when to time a fundraise then simply when your company will run out of money. The most successful raises are carefully timed to align with both market conditions and a businesses trajectory.
Here are the top four factors I’d recommend you consider when deciding when to go out and hit the fundraising trail.
1. Seasonality in your business
Businesses have seasonality, and how that will affect your metrics needs to play into your fundraising strategy.
Fitness apps do better in January, retail businesses tend to perform better in December and dating apps do better around February. Don’t be caught off-guard by seasonal changes in your business. While you are fundraising, investors will be tracking your business metrics. You want to use that seasonality to your advantage, rather than have it work against you. You want your numbers to grow during a fundraise, not suddenly plummet. If your numbers start going down during the fundraising, you might lose leverage in the negotiation, or begin losing investor interest. Know your seasonality, and plan accordingly.
2. Upcoming industry events
There are a number of industry events that can act as a way to either kick off a fundraise, or a way to create a sense of urgency for investors.
Great examples are the TechCrunch Disrupt Startup Battlefield, CES, Launch Conference, the Web Summit Pitch Competition, and any BetaKit event. Presenting at one of these competitions and performing well could give you the platform and media attention you need to start a raise. Getting a spot at one of these competitions could also be a way that you could force investors to commit prior to the event, suggesting the opportunity might go away or get more expensive after you get exposure at the event.
3. Expected company milestones
You should also be aware of events or milestones happening during your fundraise that might help to create a sense of urgency around your round.
Do you have a product launch coming up? Are you about to hit a particular traction milestone that will make you more appealing to investors? Do you have a major partnership you’re about to close?
You can use these milestones as ways of either kicking off a fundraising process, or as forcing functions to get investors to commit.
4. Holidays
The final factor to consider in timing your raise is holidays. The venture capital world in most countries shuts down July and August every year and following US Thanksgiving at the end of November, until the new year. During this time, venture capitalists and most angel investors go on vacation and are slower over email.
Starting a fundraise during these times, or trying to close a funding round during these times can be ill-advised. Assuming you’ll need at least two months from when you start pitching to when you close all of your commitments, the months that you can start pitching are September, October, January, February, March, April, and May.
Roger’s Take:
Katherine has given some great advice on the fundamentals of thinking about when to raise your next round. Along with setting strategy and recruiting A-players, fundraising is among the top three jobs for any CEO. Great CEOs are generally always in fundraising mode, the variable is how much time and effort you to put towards a formal process. With that in mind, here are some of the other factors you may want to consider:
Economic cycle
Market conditions in the general economy and, more specifically, the state of the tech sector, strongly affects the availability of capital for your company. When markets are vibrant, money flows much more easily to tech startups from both Angels and VCs alike. Conversely, in contracting economic cycles, financing for private companies dries up significantly.
As a CEO you should form a strong opinion about how you, your fellow founders, your investors and board members are feeling about general market conditions. At a minimum, try to have a conversation about this topic at each of your board meetings. Your investors are attuned to what’s happening in the broader private and public financing markets and can reference other financing activity (or non-activity) within their portfolio – all this can be a great input into the state of financing markets for you.
Pay attention to competitive dynamics. Crushing your competition should always be top of mind.
If you and your advisors feel like the economy is slowing or will slow soon, think about starting your fundraise sooner than originally planned. You don’t want to be caught trying to raise money for an unprofitable startup in a recession. Having a capital “war chest” will situate you well to weather the economic storm and emerge even stronger when markets do eventually recover.
Competitive dynamics
If you’re building a venture-backed startup, your goal should be to eventually be one of the top 2 or 3 companies within your burgeoning space. Crushing your competition should always be top of mind. If your nearest competitor has recently raised a large round this could spell trouble for you in the war for top talent and customers. Of course, it’s impossible to justify kicking off a fundraise just because your largest competitor in the Valley raised a $50 million round last week – but weigh this new information along with other factors mentioned here to make sure you don’t get left behind in the race to being #1.
Sector dynamics
Great founders are continually aware of how investors are viewing their specific market sectors. Right now, companies in the Artificial Intelligence (AI), machine learning, in-vehicle and digital health (among many other sectors) spaces are hot targets for VCs. Investor interest is fleeting – it comes and goes rapidly. Make sure to capitalize when your sector is in favour.
Investor interest
If you’re fielding a lot of validated inbound interest from potential new leads it may be time to think about raising a round sooner rather than later. Make sure that the interest is real and not just superficial “fishing exercises” on the part of in-house business development teams from large VCs. Ideally, you would have a new potential investor who has spent a bunch of time getting to know you and your business and who is basically ready to invest if you give them the go ahead. In VC speak we refer to this as a “pre-emptive round” – meaning that the new lead makes you an attractive enough offer that you decide against a full fundraising effort which would court multiple new leads now, or soon, in the future. In these situations, I’ve witnessed founders be in the driver seat negotiation-wise, as they don’t really need the money yet. This has allowed them to command better deal terms.
Got question for the investors? Email them here.