This question comes up a lot. When should a startup company raise money?
when it is strong
Here’s why:
1. Investors want to invest in a good startup business
Newsflash: investors want to invest in a good business, not a bad one.
For the purposes of this article, a good business is one with potential for considerable growth, and that potential for growth is reasonably achievable. That’s what investors are looking for. They want the price of the startup stock they purchased to ‘grow’.
This is the fundamental game for investors. When thinking about anyone dealing with your startup company, always remember what is it that someone fundamentally wants. What is their real goal?
The real goal of an investor is to have the price of their investment increase. How do they plan to achieve this? They plan to do this by investing in a company with potential for growth and with the knowledge that the potential is achievable with reasonable efforts.
Strong startups attract investors to invest in it so they get stronger. This is simply another case of the rich getting richer and the poor getting poorer. Poorly forming startups perform poorly in part because they are not able to attract investors.
Investors want to invest in a good business. The best course of action is to be multiple steps ahead. Every company is going to go through strong periods and weak periods, when you’re on the up that’s the time to shoot for that investment.
2. When the startup company is strong it’s the right time to raise money
The startup should raise money when it is strong because that is the right time to raise money. I realize that sounds circular but here’s the logic behind that.
The problem is one of being overly content.
A lot of founders don’t think about raising money when their company is strong. Why? Because founders, when their startup is doing well, believe that the startup is enough unto itself. These founders think: “what is the need?”
The problem is that when your startup is strong, you’re more likely to forget some of the fundamentals. These are the fundamentals we have discussed all along on this site--they include growing operations, raising money, growing, raising money, growing and so on. When your company is riding at the top, that is the time to remember the functions of a business.
And when a strong company keeps doing the fundamentals correctly, that’s when it can reach the higher realms of operations. Get that financing, and also have a plan of what to do with that cash injection.
As I said—it is difficult to realize that the best time to raise money is when you’re strong. This is because of founders being overly-content and arrogant. But when you’re strong, this is the right time. If you feel like your company is strong right now, then keep going and raise that money. When you’re feeling successful, these are the times to remember. This is the right time—don’t miss the opportunity.
The weaker companies don’t have the same problem of overlooking the necessity of startup funding. The weak companies realize they are not enough unto themselves so they have to ask for funding. When the founders start to tremble, and things are not good—that’s when founders think about raising money.
So if you’re feeling that the company is strong, this the time to remember growing—when everything is going well, this is the time to reach out and get more funding.
3. Your startup will get a better financing deal
This is good business and negotiations practice. When your company is strong, that is when you can really ask for investments and come from a place of non-neediness. You can be selective when it comes to which investors you want to deal with and how you want to structure the deal and the deal terms.
You will get better terms when the startup company is doing well. One of the items that many founders are concerned about is dilution, even though they don’t really understand it. See my article on dilution in order to learn more. You should raise money for your startup when it’s doing well so that it can get better terms on those types of terms. You won’t have to settle for some nonsensical liquidation preference.
Raising money when the startup isn’t doing well makes for more panicky deal making. You’ll get a better financing deal when things are going well than when things aren’t.
This is often a point that a lot of startup company founders don’t realize. The reach for raising money is often a panicky move that occurs when the company is in dire straits.
When the company is doing well, it can be more choosy about who it selects as investors. It can be more choosy with deal terms. It can be more choosy in nearly every facet. It can focus on bigger strategic points than simply getting some cash in. And of course, remember what I said before: always be thinking about what your investors can do beyond cash. You’ll be able to pick your investors when you raise at the right time.
What do you do if the startup is struggling and you need to raise money?
A very possible scenario is that your startup sucks. That’s okay. That just means your work is cut out for you. Here’s what you do:
1. Figure out exactly what would improve the startup
There is a massive difference between (a) needing money for survival; and (b) needing money to improve.
The difference is that the former is very limited in time. You never want to be in a case where you just need money to survive. Instead survival should always be a consequence of improving. In some situations, even if you give a struggling company $1,000,000 it will still fail. They’ll still tank because they don’t know what to do with that money. On the other hand, some struggling companies actually know what they will do with that money and how that money will help keep them afloat and thrive.
The only time startup investors want to invest in a dying business is when they believe they can help turn it around. Think about your startup. If it’s weak and even if you do get that cash, what will be accomplished? You need to have a robust plan for that money rather than to just keep operations going. Be able to show investors that the money will be used to improve certain aspects of the company.
A huge benefit of having a struggling company over a company that hasn’t gotten off its feet yet is that the struggling company has a lot of data points. Real data points that are very specific to your geography, industry, company, etc. are hard to come by. You can use those data points to help create the plan and figure out what exactly would help benefit the company. So even if your startup sucks, there’s still hope for improvement. Figure out what angle you can use to do so.
2. Understand startup financing deal terms
Fact: a weak company is poor at deal making.
This is because of two reasons: (i) the weak company is in a compromised position so isn’t able to command terms; and (ii) the individuals that are guiding that weak company may be inexperienced which is why the company is in that place to begin with.
Here’s how you nip those two reasons. You do your homework. That means you prepare an incredible amount. Pull out those spreadsheets. Understand your company better. Look at the numbers. Study them. Understand where exactly the company is weak and where things are going ok. Use that knowledge along with the information on this site.
Understand the deal terms better. The best way to do this is to read the relevant articles in the sidebar. Actually read and understand Phase 3 and the terms table.
Even if your company is not good, you may likely still get an investor to come on board. Don’t get fleeced. Understanding the terms and having done your homework will help you greatly.
3. Excel in one area
Not all companies can be strong in positive cashflow and have a huge growing user base and do well on other metrics. You may have to just focus on one or two aspects of the business and knock it out of the park on that one. If you’re able to show strong progress on one metric, an investor or someone who knows the industry well can help you with the other aspects.
If your company can’t be good in many ways, then just be good in one way. If you’re running a lemonade stand, and everything sucks—your location sucks, your price point sucks, your branding sucks, your service sucks, try to make the lemonade be the best damn tasting lemonade ever. If you can excel in one area, someone will help you.
What you’re actually doing by doing well on one metric is showing potential. The fact of the matter is that you can raise money if your company isn’t well if you show potential. If your startup is weak and there’s no potential then that’s a different problem.
So emphasize the potential and excel in at least one area. You’ll find what you’re looking for.
When should you do a financing round for your Houston or Dallas Startup?
The same as I’ve said before—you should raise money when your company is strong. However, I will make another comment that is particular to Texas startups. As I’ve said before, Texas has certain industries that it is stronger in than in others. That being the case, the important thing is to realize that if you’re not in the geographic area that your startup is strong in then you can still raise money, but it can take a longer amount of time to do so. Keep the course and keep an eye out for financing opportunities even if it’s not immediately necessary.
The best thing to do is to interface with investors and keep them in tune with what you’re doing. Investors have told me that they wish that entrepreneurs would keep them up to date with their progress. If you can show them the progress that you’re making, maybe one day they’ll jump on board.