“This is not the right time to raise funds. You should be focused on other parts of the business”
A statement like the one above made me ask the question of timing. When is the right time to raise funds? Is there such a thing as a right time or wrong time for fundraising?
Like the line from Chris Burgh’s song says “timing is everything in life”. If the rule of timing applies to every other thing in life, I believe it should apply to business even more. So, if I have to answer the question asked, I would say Yes, there is a right time to raise funds.
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When?
I have recently talked about raising funds from day 1, so not much will be said about that here. The funds being raised can be towards the launch of a new product, expansion of operations, scaling your market, marketing, growth, etc. Whether you are raising seed funds, Series A, Series B, and so on, here is one thing that can help you better time your fundraising expedition.
Milestones
What have you just achieved? What do you want to achieve?
Surely, you can’t wake up from sleep with the idea of the ‘next big thing’ and start looking for financiers. You want to ensure that you have achieved a milestone, based on specific metrics before you go looking for people to commit their funds. It could be that you have just launched your Minimum Viable Product (MVP), or you have acquired a certain number of customers or users. There should also be a clear milestone you want to achieve with the funds you are bringing in. Do you need the funds to scale up operations, to fund further research, to launch in a new country, or/and to get your product to the market?
The point here is that the milestone convinces your would-be investor that you have done something worthwhile, and so, require significant capital to take your product or solution to the next stage/milestone.
Valuation
Before you go on to raise funds, you need to have something that can be properly valued. Why? This is because you generally cannot raise more funds than the value of the startup. If, for instance, you are bringing in an equity investor, the amount invested should entitle the investor to a part of the business and you can only determine how much when you have valued the business. I will talk better about proper valuation subsequently but keep in mind that if you are raising $5 million in funding for a business that is valued at $5 million, you will be trading away 100% ownership.
What many startups do is to give a maximum of 20% equity when raising seed funds, and a maximum of another 20% equity for Series A. This is a way to maintain a reasonable ownership percentage especially where you have co-founders.