I’m often asked by entrepreneurs: when is the right time to raise money at a startup? I invariably say two things in response:
- Whenever you can
- Right now
Whenever You Can
Most startups typically go through ups and downs. Say you’ve just completed 4 consecutive quarters above plan. You growth is high and your burn rate is reasonable. You have enough cash to go three more quarters before you need money. What should you do? Unless you are virtually certain that your quarterly streak will continue, I’d say raise money.
Why? Because the increase in valuation / decrease in dilution from adding 1-2 more quarters to the streak is nothing compared to the decrease in valuation / increase in dilution from tanking a quarter along the way. Whether you’re a subscription or perpetual company, investors will always want to see new sales / new bookings as your primary growth metric. While the SaaS model does damp revenue volatility, that’s precisely why a VC will want to see bookings. And, in my experience, bookings are volatile. During my 24 quarters at MarkLogic, we hit our bookings targets about 90% of the time. But I can say, sometimes when we missed, we missed. I remember one quarter coming in around 50% of target. Right after that quarter is exactly when you do not want to be raising money. And, by the way, it’s usually precisely when you need it.
The fastest way to end up bridge loans – where you lose almost all control of your company and are fed milestone to milestone – is to not raise money when skies are blue and instead try to raise money in a storm. Much as I love them, VCs are not in the business to be nice people: if you’re coming to them, hat in hand, with 30 days of cash in the bank, I can assure you that you will not raise money on favorable terms. You could have done that 90 days ago. But, if you’ve tanked the quarter, now it’s too late.
To show this in reverse, one trick VCs love is to sneak a peek at an extra quarter. I remember one time when I was raising money, we’d agreed on terms, and the lawyers said it should take 2-3 weeks to close the round. It was June 12th, so if everybody pushed hard we should have been able to close the round before the quarter ended on June 30th. But suddenly everyone disappeared. Hello? Hello? Why aren’t the VCs calling back? How come their lawyers have gone silent and are taking forever to turn paper? Hello? Hello?
We made the quarter and the round closed July 5th. Arguably, I could have gone back and asked for a higher valuation based on having made the quarter – i.e., knowing that 2Q would be successful wasn’t priced into the round. But the VCs are good, they knew I wouldn’t do that – and they wouldn’t have let me if I tried. So they got a “free peek” at the 2Q results. I’ll bet you $1000 that if we’d tanked that quarter, they’d have come back to me seeking to lower the valuation. The game is neither fair nor symmetric. (So time your round to close before the first day of the last month of the quarter.)
Particularly for new companies, I believe the right time to raise VC money is right now. Too many would-be entrepreneurs treat fund-raising like going to the Senior Prom. I need to find a date. I need to book a limo. I need to do my hair. I need to get a dress.
Translation: I couldn’t possibly go talk to VCs about raising money until I have a great slide deck, an advisory board, a CEO, a Beta product, or some customers.
To me, it’s all avoidance. Traditional A-round VCs want to catch you in your dorm room. They are used to talking PhD students (or drop-outs) about their visionary ideas. They are not worried about whether you have a CXO. (In fact, they would be more than happy to help you find a CXO which, by the way, I wouldn’t recommend.) They are worried primarily about the market opportunity, your idea, and your technology. As Don Valentine always said: great markets make great companies.
What’s more, they want to invest in people they know. One way to get known is to build a relationship over time as you think about raising money for your company. The best way to do this is to find someone in your network who can connect you to a top VC partner and who’s spent time getting to know you and your company (e.g., someone who’s perhaps done some advisory work or an angel investment). Then you want that person to send a top VC an email that looks like:
I have been working a bit with Mark Smith who just (ideally, either left great company or completed or ideally dropped out of a great PhD program) and who has a very interesting idea for a company. They are thinking about raising money and thus weighing the pros and cons of bootstrapping, an angel round, or a VC round.
I’d suggest meeting with him.
This way you remove the “prom factor” from your VC meetings because are not going on the big one-shot date. You’re not raising money. You are thinking of raising money. So it’s not awkward for them to not invest – in fact, they never even need to say no. But if they like your idea and your company they’ll be shoving money in your pockets whether you ask for it or not.
Better yet, you can invoke their competitive instincts by noting that you’re chatting with several VCs about whether you should raise money. Best of all, this approach lets you benefit from their wise (and free) feedback as you develop a relationship over time. If they are even moderately interested, they are going to want to track you (i.e., “hey, come back in a month and let’s have a coffee”). If you continue to make good progress during that time (i.e., accomplish what you say you will in a given timeframe), you not only build credibility but also slowly transform yourself from stranger to interesting person who I’ve been tracking for the past 6 months. That becomes even more helpful when the VC needs to convince his partners to invest in you, as he invariably will.
So, now you know the secret. When’s the right time to raise money in a startup? Either right now or whenever you can depending on your situation. No business ever died from a little extra dilution. But, as the ever-quotable Don Valentine also pointed out: “all companies that go out of business do so for the same reason; they run out of money.”