Last Update: February 17 2007
I am flattered to be able to say that entrepreneurs and business executives are contacting me these days seeking business advice. I am always happy to help and frankly, I really enjoy working with ambitious, motivated people.
One question that I constantly get is, “when is the right time to raise money for my business or startup?”
There are tons of resources on this topic. But I’m just going to give you my opinion which is based on my personal experiences and what I have seen others experience as well.
I will start with a disclaimer: every business is different; I realize that. If you want to start a restaurant, you will probably need some startup capital before you even get started. But if you’re building an Internet startup, you really don’t need money to start unless you just want to draw a salary right out of the gate. And if you’re building an Internet startup, chances are you’re going to do something that isn’t as proven as something brick and mortar, like a restaurant.
Let me first outline what I think is wrong with the mentality most entrepreneurs have, especially when they’re building their first startup.
Most entrepreneurs seem to think that you should go out and raise money before you prove that your idea is any good. And don’t get me wrong, this is exactly what Bill and I tried to do back in 1999-2000. That was the advice we got (remember that a lot of people giving advice have a vested interest in seeing you raise money, or at least try to – lawyers, bankers, potential investors, consultants, future employees, etc.). That was what we thought all businesses were doing (which at the time, they were). It was the thing to do… or so we thought. How cool would it have been to be able to call my friends and family and tell them someone just wrote me a check for a million dollars? Very cool. But when reality set in, we realized that raising money was not the first thing we needed to do. We needed to prove that our strategy was going to work, that customers were actually going to buy stuff from us, and that we really could run a business. We also needed to understand why we should raise outside funding and what we were going to provide investors with in return. This is not easy stuff.
So in a nutshell, here is my advice:
1. Don’t even think about raising money until you build your product or service and prove that people will pay for it, or at least use it. At most, I would start talking to investors so that once you prove your concept works, you will have a network to tap into.
2. If you need to raise money in order to prove your concept, raise as little as possible. Find $20,000 from an angel investor or borrow the money from a bank.
3. Once you prove that your concept works, then you need to decide if money will indeed help you grow – many times throwing money at something simply isn’t the answer and can hurt more than help. A lot of people I meet with want to raise money to hire a salesperson, yet they’ve never sold any of their products or services themselves. Bad move, in my opinion.
4. If you decide that money will help you grow, figure out exactly where you’re going to spend the money and how it’s going to provide your business with a return on investment. That will help you decide how much money you need to raise and will help potential investors envision where their money is going to go.
I think there is a lot of perceived glamor that comes with raising money. And it’s easy to get caught up in all that stuff, I know. But I would advise you not to let yourself get caught up. Be smarter than that. Do what’s right. Not to mention, capital raising takes a long time and if you do it prematurely you will give up too much stock and regret it later. Likewise, investors can be a pain in the ass (thankfully we have awesome investors but most of my friends cannot say the same thing), venture capitalists are scary people, and stock issues are complex and expensive to deal with.
If you have other questions about raising money or venture capital, here is a great blog dedicated to answering all of our questions.
Thanks to Dick Costolo for inspiring me to write this post. He wrote a similar one called, Starting the Company – When to Raise Money – I would read his post, too. He’s probably a lot smarter than me.