I’m going to take a few chances in this column, including the chance that I’m kind of beating a topic to death. Definitely taking a chance that some of this is going to be misunderstood.
When should you look for investment in your startup?
I get asked this a lot, mostly from early-stagers who are just getting off the ground and are somewhere between mockup and minimum viable product. It’s funny too, because I’d say about half the time I get asked this question, it’s from someone who is already seeking investment. And some of those people have no plans to move the startup any farther along without some outside money to finish the product, promote, hire, etc.
It’s like when someone asks you if they should wear a certain something. You know they’ve already made up their mind.
So if you’re really asking the question, my answer is “not now.” It’s one of those cyclical questions. If you need to ask when you should seek investment, I’m 99% sure you shouldn’t be seeking investment yet.
Don’t get me wrong. There’s no magical moment where a light will go on and you’ll realize that now is the time. But if you’re building your company properly, so many things will line up for you that the question becomes a no-brainer.
You’ll have reached a plateau in how far you can take the company with your current resources at peak efficiency and you’ll see the path to a next level so stupidly easy to get to and so ridiculously prosperous for everyone involved, that you’ll be perfectly willing to go through the pain, the rejection, the time-suck and the loss of equity that comes along with seeking investment.
Most early founders don’t realize that when they take outside money, it’s not their money. It’s not even the company’s money (unless it’s dumb money, but that’s a whole other column). It’s still the investors’ money. And unless you have an unimpeachable plan to capitalize on that infusion and create a massive return, and unless that plan is easily explainable to, say, an eight-year-old, you’re going to be doing things their way, not yours.
Look, I don’t even say this with any sort of derision. It’s what I would do if I invested in companies that didn’t have unimpeachable, idiot-proof plans. Which I don’t.
But it’s 2015 and, oh yeah, the Internet. The lowering of barriers of entry, the ease of creating an MVP, and the explosion of new sales and distribution channels didn’t just make it easier to create a new product. All of these things made it easier to sell that product too. So it should go without saying that you should be able to prove out the financial viability of whatever it is you’re creating long before you bring it to mass market.
Beyond that, there are all sorts of ways to be able to project sales at a mass market level from a very small data set, or the kind of data you can get in a small market within a few months. This can go four ways:
By the way, No. 4 happens a lot.
- The product sells so well that you don’t need investment.
- The product sells so well that you DO need investment.
- The product sells so poorly that a bad idea is now staring you in the face.
But let’s say you’ve proven that you can sell. That raises the next question: At what point should you make the investment call?
If you really want to be sure, stick to this rule:bAlways commit 5-10 percent of what you’re asking for.
If you’re trying to raise $250K, then be prepared to put in $12-25K yourself. And I’m not talking sweat equity or sunk expenses up to that point, but straight cash, a check written from your personal account into the company account.
I know what you might be thinking. If you can’t do this financially, sell enough product so that the company can reinvest profits back into the company equal to that 5-10 percent.
If you can’t do that, I get it. I’ve been there—struggling financially and hoping that I could raise enough money to get me enough runway to prove out what I was sure was going to be a massive success. It’s human nature to try to push this big button.
But it’s not the ideal way to go. At that point, you’re raising money for the wrong reasons, and you’ll either wind up with dumb money—and this will ALWAYS come back to bite you—or you’ll be giving up a ton of your massive success and, like the picture I painted before, you’ll be building the investors’ company, not a partnership.
Or worse, you’ll waste a whole lot of time seeking a payday that never materializes.
I’d say do whatever it takes to not do this. If you have a job, keep it. If you don’t, get one. I’m not in a position to tell you how to run your finances, but coming into fundraising from a point of weakness is something that no entrepreneur or investor would ever advise you to do.
The silver lining on that cloud is that there are a lot of things you can do these days to extend your runway. And if you truly believe in what you’re doing, these options, which seem difficult at the outset, will keep you going. Slow the plan down, put things on hold, cut expenses way back, start making cold customer calls, pivot. Whatever it takes.
Just don’t raise for the wrong reasons.