For every business, the right time to raise capital will be as unique to them as their business plan and the product they offer. Raising cash is a significant part of an entrepreneurs’ endeavours and, for better or worse, a considerable challenge.
Not every startup needs to raise funding, many successful startups will bootstrap themselves to create growth with little or no external capital (particularly for those lucky few who are cash flow positive from day one), finding ways to ‘hack’ their way to the top over time. However, most high growth startups need money to get things moving, by capitalising on their idea (a seed round), or to grow into an established company quickly (growth round). Without funding, startups seeking high growth will fail, requiring too much capital to keep pace with the market and their competitors.
Put simply: Capital allows Growth.
When to Raise Seed Capital
The first seed capital is the trickiest. It is the first money you’ll get into your business beyond your own (or your friends and family) and is, therefore, the first time you have to convince someone else, who most likely don’t know you yet, that your company is worth investing their money in.
Seed capital is typically used to build out your idea and validate its potential in the market. It’s what takes you from MVP to product-market fit (where your product solves a particular problem for a defined group of people, representing a clear market for your product). But when is the right time to raise seed capital?
There are many opinions on this question. Typically, the right time to consider raising seed investment is once the following three conditions are met:
- There is a minimum viable product (MVP). Importantly, this doesn’t always have to be a working prototype, but it must demonstrate that you have refined your idea and show how it solves problems for other people.
- A level of customer traction is proven – you have a demonstrable and repeatable formula for obtaining paying customers. Real customers, not your aunt or neighbour. A user base that are paying customers is desired, but not essential.
- There is a robust business model and plan. This doesn’t have to be a short novel in length, but it must describe in some detail how you plan to expand, the metrics you’ve currently achieved, any competitors in the space, and the overarching milestones you are looking to accomplish with the injection of seed capital.
When to Raise Series A/B Capital
Growth capital (Series A/B) is when you have reached product-market fit (there are varying levels and opinions on when this is) and have built out your acquisition channels, so more capital is required to grow as a business and reach more of your already identified customers. E.g. you know if you put in £10,000 into marketing, you’ll get £30,000 in sales.
At this stage, there is a clear demand for the solution your startup provides, and you will likely need more employees to help your small team grow and maintain your customer base.
When to Raise Series C/D Capital
Subsequent rounds (series C/D onwards) occur once your business has exceptional traction, is an established company in the space, and is looking either to expand into a new market (international regions/product space are common reasons) or to fight off competitors that are catching up.
An example might include Revolut, who after raising their Series B on Seedrs, has since become a unicorn.
How Do You Know if You’re Prepared for Fundraising?
Before you take the plunge to pitch for investment, you need to ensure you’ve ticked off the following steps.
Laying the Groundwork
Have you considered your company’s overall health from every angle? Check out our guide to the 7-Commonly Asked Questions By Angel Investors for inspiration. Have you thoroughly researched your industry, competitors, and the market? You need to define your products, prepare financial projections and ascertain how much capital to raise, and whether to tap into debt or equity.
As you court investors, this preparation, although time-consuming, will equip you with all the relevant information to answer investors’ tough questions.
Whilst there is a large variety in ‘types’ of investor, from individuals investing their own capital or on behalf of their clients, they all have at least one thing in common: they are looking for investment opportunities in businesses that offer the potential of significant returns.
Different types of investors may be specialised in specific stages and funding rounds they invest in, so understanding these difference will be extremely useful for an efficient fundraising round and targeting the right investors at each raise. Potential sources of capital include founders, family, friends, angel investors, venture capitalists, single-family offices, business incubators, investment groups and crowdfunding platforms.
For a more detailed look at the types of investors your business could attract, take a look at our Entrepreneur’s Guide To Investors.
Highlighting the most important aspects of your business, your pitch deck should include information on your company, team, competition, target market, milestones, future plans and funding requirements. An effective pitch deck establishes a compelling narrative about your company’s vision and plans and details what makes your startup the one that will win.
We’ve created a pitch deck guide (including a template) to help you get started – check it out in our blog on How To Create An Awesome Investment Pitch Deck.
Never forget that when it comes to early-stage businesses, investors invest in people and teams as much as they do in the product. In the early stages of a start-up, there can be limited quantifiable metrics on the business, but there is definitely qualitative information on the people behind the company. As the adage goes, investors “bet on the jockey, not the horse”.
So alongside the metrics for growth and success, spending more time highlighting your unique team dynamics and the mixture of human capital leading to that success will go a long way in anchoring your pitch.
Moreover, not only will your colleagues and co-founders help grow the business with their diverse skill-set and experience, but they will be absolutely vital in keeping the business functioning when the CEO and founders are busy preparing for investment, which can be a full-time job in itself. Raising funds means that you’re selling 24/7. It’s a big headache; you have to manage the company while also persuading people to invest their hard-earned cash in a startup.
While the process of investment can give the impression that an investor and a startup are on opposing sides, both groups share the same vision of success. It is crucial to regard your investors as a part of your team. So as you prepare to raise capital, treat each investor as a partner long before the negotiation is finalised. Ask for and follow the advice of trusted investors along your journey. Always maintain contact with your investors – get into the mentality that you’re always raising, or preparing to raise. Continually fine-tune your pitch and continue to engage the most options and relationships available, so when the time comes, you have the utmost leverage.
With a plan in hand, armed with your preparation and an understanding of the mechanics of getting capital, you’re ready to raise money for your startup. Stay patient and persistent. Could crowdfunding be for you? Find out more about Seedrs and how you could raise investment on our platform here.