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I have worked with a number of companies seeking funding. There are a couple of questions that I ask early on.
- Do you need or want funding? And, if so, what type?
- What do you need to raise capital?
- How far can your business go before you raise?
Let’s get started…
Do You Need or Want Funding? And, if so, What Type?
Below are a few questions to consider when planning for funding needs.
- How capital intensive is your business?
- If you’re developing a new fuel, and need to prove feasibility with a pilot plant, you will probably need a meaningful capital investment. If you are a software developer building an app with low operating costs (here’s an example of one), you may never need to raise money.
- How early will revenue cover costs?
- If you’re building a consumer messaging application, you may not be able to charge users or generate ad revenue without inhibiting growth early on. It seems unlikely such a business model could grow substantially without taking outside capital. But, frequently SaaS products are able to break even pretty early.
- How quickly do you need to grow? And, how competitive will the industry be?
- Are you in a hot space with huge potential and high economies of scale? If so, you may need to grow aggressively to avoid being crowded out. If your competitors have already launched, you may need to compete on price as well.
Keep in mind that many startups raise significant capital despite business models that may be conducive to funding growth with internal cash flow. This may be because they seek to grow more aggressively than internal cash flow supports, or it may be for reasons I don’t understand.
Take, for example, Slack and Uber. Both were very successful early on, and we’re able to acquire customers very early. However, for one reason or another (marketing strategy, competitive dynamics, growth goals) they still raised outside capital.
What Do You Need to Raise Capital?
Raising capital isn’t as simple as checking off a list of items.
However, investors will frequently ask: Why you? And, what is your competitive advantage?
They seem to be trying to ascertain two things, which we might as well call “deal-makers”:
- Is your team nearly failure proof?
- Investors frequently talk about the team. This appears to be code for either:
- “Do they have an exit?” or “Have they built a successful business?” No one really needs to see Elon Musk’s next pitch deck. OR
- “Do they have a talent almost no one else in the world has?” I think Gimlet is a good example of this.
- Investors also want to know the team meshes well, and that they are in it for the long haul. So we could include “Are they at risk of falling apart?” However, this is more of a deal-breaker than deal-maker.
- Just remember, there are thousands upon thousands of smart people, with great degrees out there. Having a couple of engineers and an MBA from Harvard is not the definition of a great team.
- Do you have something no one else has?
- If you have an easy answer to why no one else (or very few people in the world) have the opportunity to do this, you have a leg up. IP is a good example of a way to get a leg up.
If you don’t have either of the “deal-makers” listed above, and possibly even if you do, investors are going to want to see certain things before they write you a check. Specifically, data (or, on occasion an incredible story). Write down a list of the targets you need to hit. Are you there yet?
These targets will evolve over time as you speak to investors, but you should go ahead and set some milestones as early as possible.
You have to ask yourself an important question here. Can you get far enough to raise capital?
If not, you may need to raise earlier or plan for some contingencies.
How Far Can You and Your Business go Before You Can Raise Capital?
You can take a complex approach, but we believe in keeping it as simple as possible.
From a business perspective: how much capital can you set aside, and how far will that get you? What are your upfront and monthly expenses?
From a personal perspective: how long can you afford to be unemployed financially and emotionally?
We have synthesized this in the High-Level Runway spreadsheet — available to members. Sign up for free at www.startupcarta.com.