Tactical Fundraising: When Is It The Right Time To Raise Capital For Your Startup?

When is it the right time to raise capital for your startup? That’s a question every entrepreneur has when planning their startup’s growth and success. Bringing in investors too early in the startup’s journey can result in diluting ownership.

But waiting too long can result in your losing the strategic advantage. You might miss out on getting the product to the market and lose that edge over the competition. And that’s just one of the potential downsides of delaying a crucial capital raise.

So, how to time the funding drive to ensure the company’s uninterrupted growth and success? Read ahead to find out.

Understand that Every Business is Unique

For starters, understand that every business is unique in how it addresses customer pain points and the targeted niche. Accordingly, your business plans and product portfolio are also distinct. Don’t make the mistake of planning a funding drive according to your peers or competitors.

Before approaching investors, you should have a carefully designed set of goals with a clear roadmap for achieving them. Investors will need assurance that you’ll strategically deploy the funds and deliver viable returns. If you’re not ready with the roadmap, delay the capital raise for an opportune time.

Rolling revenues back into the business in the initial stages is undoubtedly advisable. You’ll use the traction to grow the company without diluting equity or taking on debt. Securing your decision-making capabilities is also an advantage.

For starters, some great examples include Google (Alphabet), Microsoft, Uber, Airbnb, and Netflix. These mega brands leveraged their revenue streams to develop disruptive technology and expand to new markets. At the same time, they secured and increased their customer base and market shares.

Once you’re confident the company is stable and growing well, that’s the right time to raise capital for your startup. Remember that negotiating with investors from a position of strength will ensure more favorable terms and conditions.

Getting funding to carry the company through a lean time is never advisable. For instance, when you’re running low on revenues and need money to pay your vendors and suppliers. The inability to accurately estimate cash flows won’t look good in the pitch deck.

Also, remember that relying on revenues in the initial stages is great. But eventually, you will need to raise funding to accelerate the company’s growth so it can keep pace with the competition. Without the growth funding, the company is set up for failure.

Estimating Time Frames

If you’re confident this is the right time to run a fundraising round, expect to close in six months. Again, you can expect money in the bank depending on market conditions and the availability of gunpowder. A good rule of thumb is to plan for the capital raise according to your runway.

You should have at least two years’ worth of money to sustain operations. Also, factor in around 15% to 20% of the round as a buffer for unexpected contingencies. Raising a couple of months before you absolutely need the funds is acceptable, but not 18 months. That’s too soon.

Company Valuation

The right time to raise capital for your startup depends on several factors. For instance, the stage your company is at. Review your company and compare its valuation with how investors value later-stage companies in your vertical.

The company’s current valuation should influence your decision to run a round. Investors may agree to set the value to a higher number, which is beneficial if you’re looking to prevent excessive dilution. However, higher valuation raises the bar and investor expectations.

You will feel the pressure for accelerated growth and results even though the company is not ready. Further, if you need to raise subsequent funding rounds, the valuation will have to be higher. New investors may not agree to pay the higher price if the company hasn’t performed as expected.

You may end up having to accept less than favorable terms and conditions. This is why estimating the future growth and valuation trajectory you would like to see before raising is crucial. Delaying the round or raising a smaller amount of capital and leaving value on the table is advisable.

You’ll build robust relationships with investors and supporters who are more likely to participate in future rounds. You’ll build confidence in investors, who will be more interested in backing the company through its later stages.

Expert fundraising consultants also advise you to raise a small round even though the company does not need the capital. Investors will assign a higher valuation if it is stable and demonstrates accelerated growth.

A higher price inspires confidence in the external market, to your employees, and other stakeholders, streamlining your exit strategy.

When is it the Right Time to Raise Capital for Your Startup? The Different Stages!

Raising Seed Stage Funding

Seed-stage funding is the next step after bootstrapping and raising from friends and family. At this stage, you’ll reach out to external investors outside your immediate circle and convince them about the business idea.

Not only will you use the money to manufacture the product, but it will also help validate the concept. Before this round, you will have built the Minimum Viable Product (MVP) and tested it on a few initial customers. These customers are actual users who’ll pay for the products that solve a real problem.

If you can demonstrate traction and repeat buyers in the business plan, that’s the right time to raise capital for your startup. The pitch deck will describe your growth strategies and crucial metrics like the number of units sold and revenues earned.

You’ll also talk about competing products, their traction, and your brand features that can supersede their sales. The deck will also deliver projections and milestones you intend to achieve with the seed capital injection. For instance, growing production capabilities and developing new product features.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here), which I recently covered. Thiel was the first angel investor on Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Raising Early-Stage Funding

To raise early-stage capital, you’ll go one step further. Since you have a proven customer base and robust sales, you can now demonstrate a large potential market. The market slide in the pitch can offer market validation, including customer reviews and feedback.

You can also articulate in detail the problem and how your products are excellent solutions. In short, a viable product-market fit. Also, talk about the advanced features your product now has, along with any additions to the portfolio.

Now that you have seed funding in the bank, you will have compiled a well-rounded founding team with diverse talents. You’ll allocate a pitch deck slide to the team, describing their experience and skill sets and the value they add.

The pitch can now feature a sales, revenues, and profits slide to demonstrate traction. The use of funds slide will talk about the milestones you intend to reach by deploying the funds. For instance, hiring expertise, marketing and advertising, and more.

Most importantly, the pitch can talk about the returns investors can expect. Projected growth rates and revenues expressed in real-time data create a compelling picture that investors will appreciate.

If you have a robust network and connections with VCs, angels, PE firms, and other investors, it’s time for raising.

Raising Series A and Series B Funding

Entrepreneurs raise their series A and series B rounds when the company is poised for accelerated growth. This is why these series are also called growth rounds. At this time, the company has a well-established customer base and robust product-market fit.

Customers are familiar with the brand, and you can confidently deploy capital toward marketing and advertising. Any such efforts will surely yield 3x returns in sales. Also, since you have consistent sales, you’ll need to expand manufacturing operations and distribution channels.

This could also be a good time to explore other markets to expand reach and capture a bigger market share. The growth funding you raise can grow the company exponentially by making all this happen. You could use the additional capital for R&D to create a broader product portfolio.

At this stage, the company is well-established, and you’ll likely have a robust relationship with your investors and backers. Companies raising series A and series B rounds typically have investors with board seats who assist with more than capital. You can also rely on them for strategic guidance.

Thus, they will be open to supporting the company even if it is facing temporary instability. You can expect funding to tide you over the setbacks and navigate challenges until conditions improve. The right time to raise capital for your startup can also be about bridging short-term gaps.

Raising Series C and Series D Funding

Companies looking to raise Series C and Series D funding are typically large brands with exceptional traction. They are well-known within their vertical and have a dedicated customer base. the right time to raise funding is when you’re ready to expand to new markets.

New markets can include global locations and additional product categories in horizontal and vertical sectors. The company is likely poised for strategic collaborations, mergers, and acquisitions that will result in its reach exploding.

Such companies may also need capital to deal with competing copycat products breaking into the market.

Regardless of the stage, when you raise a funding round, understanding the steps to pitch to an investor is crucial. It can make the ultimate difference in a successful round. Check out this video in which I explain how it’s done.

Is This the Right Time for Your Startup to Raise Capital?

Although this question is termed a bit differently, the answers require you, as the entrepreneur, to examine the company thoroughly. You’ll take a good hard look at its potential and whether you’re in the right space to approach investors. That’s the right time to raise capital for your startup.

Is the Business Plan Investor-Ready?

Review the company and its metrics from the investor perspective. Ask questions like:

• Would you be interested in investing in the company?
• Have you researched the industry and competition in detail?
• Do your products have the potential to attract customer interest?
• What are the financial projections?
• How much capital do you absolutely need?
• Do you need to raise equity or debt? Or a combination of the two?

Who are the Targeted Investors?

Even as you’re considering the right time to raise capital for your startup, create a list of potential investors. For starters, you’ll target investors who specialize in the business vertical where you work. These investors have industry-specific expertise and can understand your products and ideas better.

Further, they’ll offer you more than just capital. You can rely on them for guidance and opportunities to connect with their networks. You’ll also target investors looking for companies in specific growth stages according to their expected returns.

Researching projects investors have backed in the past is a good starting point. Accordingly, you’ll approach angels, venture capitalists, family offices, private equity firms, investment bankers, or any other categories.

You’ll also research their investment strategies and if they have a professional handling investment decisions. When compiling potential funding sources, don’t overlook the possibility of crowdfunding opportunities depending on which stage your company is at.

What Goes into Your Team Slide?

Entrepreneurs must understand the importance of the team slide. More than the product portfolio, market reach, or brand name, investors focus on the people behind the brand. Talent, skill sets, and business acumen are high on their list of priorities.

They need to see the right blend of team dynamics, experience, success track records, and other qualities that spell success. While the founders and CEO focus on capital raising, the team keeps the company operational.

In the contemporary startup ecosystem, it’s not unusual for founders to leverage their team to assist in fundraising.

Are You Ready with a Compelling Pitch Deck?

Ultimately, the entire fundraising process comes down to the pitch deck. A well-designed pitch delivers the right amount of information with just the right impact. You have a short time to grab investor attention, so make the most of their time.

A great pitch tells a story and includes stats and metrics in compact slides with a limited number of words. Your objective should be to relay the vision and mission and ensure the concept remains with the audience after they leave the presentation room.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.