Unless you plan to start a business that is profitable right out of the gates and won’t need venture capital, then from the hop gear up for a financing. Every startup should be built to fill a need/want in society with its development timeline planned around its capital need requirements.
A world-class athlete spends four years training for the Olympics, and does everything she can to peak right at the very moment she’s set to compete for gold. Startups need to prepare for financings in a similar vein. The profile, cadence, and business development of a startup should be rising right at the moment it is being pitched to investors…
Unfortunately, I’ve seen too many founders overlook this critical timing element, and instead scramble into a financing, expecting investors will be as head over heels for their startup as they are. If it’s not a frothy venture capital market, founder disappointment is almost inevitable in those instances. And the startup may find itself in financial difficulty because the venture capital it was relying on isn’t available or interested in taking the risk.
So, to avoid this potentially devastating scenario, which in the current climate will happen more than any time in the last decade, I’ll share three keys to closing an early financing round.
Major milestone just completed: Bottom line, you need a track record and a recent win before pitching investors. Venture capital wants to be a part of a company that has delivered in the past (as it said it would), and recently achieved something impressive.
That impressive achievement is often related to things that de-risk the startup or add fuel to its growth. It could be that a startup just inked a deal with a major partner, cleared a research and development milestone that validated a vital component of the business, generated its first big sale, or received support from a reputable name.
Exciting use of proceeds: No investor wants to part ways with their hard-earned capital so a startup can use it for general administrative expenses. It’s boring. On the contrary, venture capital loves to know their investment is going toward achieving a significant milestone that could justify a positive rerate.
Not desperate for money: An elite Olympic athlete does everything they can to enter the world competition in peak shape, injury-free, and full of energy. Likewise, founders should never, ever go into a financing on fumes.
No venture capitalist, and I mean not a single one, wants to put money into a startup that is almost out of money. If they do, they’ll be asking for a cheaper valuation than what the founder proposes.
In respect to raising capital, the mindset of a startup should be that they are always looking for an opportunity to raise funds. It should be a part of their model in those early years. If a startup could run out of working capital by August, preparations for the capital raise should be well underway a year in advance!
If you want to see what a startup in pressing need of capital looks like, review the recent developments involving WeWork.
The venture capital market has been frothy in recent years. That’s all changing.
As a startup founder, you are not entitled to one dime of venture capital. It’s an opportunity. So don’t waste it. Successfully closing a financing round takes a compelling and exciting company with big goals that is hitting its stride as it looks to raise growth capital. Give yourself ample time to close a financing by preparing for it well in advance. Furthermore, time it on the back of a newsworthy event that demonstrates your venture is gaining momentum.
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