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When to Seek Funding

Posted by: Today's Tip Contributor on October 25, 2010

Many entrepreneurs dream of raising capital right out of the gate. The reality is that most must bootstrap their startup long before an angel investor or venture capital firm will give them the time of day. Entrepreneurs typically start with small lines of credit from banks to discover their market, graduate to investment from friends and family to develop their prototype, then move to angel investors to prove the prototype, and finally shift to venture capital funding to scale the business and get profitable. Here are some tips to consider if you’re looking to get your startup funded:

1. Understand the risk/reward equation. Getting funded is a risk/reward proposal to the investor. As an entrepreneur, you can either work really hard on the risk part of the equation (i.e. have revenue) or you can focus on reward (e.g., "we have the next Google"). The biggest challenge you face is you must present an equation that appeals to investors.

In this economy, revenue is the most compelling argument you can make. Investors that historically could be counted on to put money into venture capital funds are no longer able to do so—meaning venture capitalists don’t have as much freedom to focus on the risk. Every step of the way, build the business by adding customers and revenue, taking risk off the table for the investors.

2. Only take the money that you need to get to the next step. The caveat is that you need to pay attention to what the market is doing because it will affect your valuation. Taking money down the road may be more expensive than taking less now. So even if you still have plenty of cash in the bank, you need to watch what the market is doing and understand how that affects your valuation.

3. Understand the importance of selling. When you don’t have cash in the bank, you’d better know how to sell. It’s amazing how many entrepreneurs who raise capital are great in academic discussions but terrible on sales calls. When you haven’t raised venture capital you need to get on the phone and persuade people to buy your product. You need to demonstrate customer and revenue growth. If someone isn’t selling, you aren’t growing. If you aren’t growing, investors won’t be banging on your door.

Bottom line? Get customers, show revenue, and prove your model before approaching investors.

Clate Mask
Co-Founder and CEO
Gilbert, Ariz.

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