The Best Time To Raise Capital
I’m often asked by entrepreneurs, “when is the best time to raise money?” The answer is as old as time, the best time to raise money is when you don’t need it. You see when you don’t need cash people come out of the walls eager to lavish it on you and therefore it is less expensive to obtain. Then I take my tongue from my cheek and give a more thoughtful answer.
The more progress you make with your company, the less risk an investor assumes when investing. The further along you can lead the company, the lower your companies risk profile which translates to higher valuation and less dilution. Investors love to put money to work in a company that is using cash to ramp-up sales & marketing. If your company has a working product, paying customers, a model that is proven and working so that an investment in sales and marketing will result in a huge growth in revenues and profits….. that sounds highly fundable. Investing in a company with R&D risk is less attractive.
So the answer to when is better asked after addressing, how far can you take your company without the need for outside funding? The further along you take your company the less company you will share with investors. On that pesky other hand that is always making things more confusing, if money can make you bigger faster better, then a smaller slice of a bigger pie may be better to your goals. As illustrated in the Risk/Reward graph below, there is a direct correlation to company progress/risk and valuation.
On which of the hypothetical companies would you prefer to roll the dice and make an investment based on their proposed use of proceeds pie charts?