Fundraising in the U.S. Part 2: The Right Time to Raise Money
By Michal Tavrovsky, co-founder and COO of JFE Organization.
Fundraising in the U.S. Part 2: The Right Time to Raise Money
Last week I got a call from a founder who was about to have a heart attack or commit suicide because it finally hit him that he barely had enough cash for his company to last for another 4 months. As he was going though a nervous breakdown on the phone with me, I really wanted to say: “Where the hell were you 6 months ago?”
Of course, I did not say that. Instead, I told him to calm down and get his sh%$ together. He’s not the first and last founder to deal with such problem or I would rather say challenge. I don’t even know how many times I’ve seen founders making the same mistakes of not allowing themselves enough time to fundraise, or waiting too long to get perfect metrics and then hitting the plateau, or just being in the wrong place at the wrong time all together.
When you are running a startup and need outside capital to make it work, here are some important factors to know and consider:
1. It’s never too early to start fundraising. In fact, as the CEO of the company, you are always fundraising even when you are not. You want to maintain warm leads so that when that time comes, you know whom you are going to call. You want to build relationships in the venture community; you want to stay in touch; you want to know them personally.
Many founders think that while they are focusing on their product, growth, marketing, sales, etc., it’s not the right time to actively seek capital. The key here is in how you define “seeking capital.” It may be the wrong time to ask for money, but it’s always the right time to meet new investors and ask for advice.
Maybe you just launched your beta, or maybe you are not even there yet and you are at an event standing in front of a later stage investor. You still want to meet him or her today because maybe in 2 years from now, you will contact them while closing your B round. And you will say: “Remember 2 years ago, you told me _______.”
As in the case of the founder who called me last week, you definitely want to avoid waiting until the last moment, when you are running out of money and you have no one to ask. As the founder of your company, you want to be active in the startup playing field and have the right resources and network, rather than starting from ground zero when you suddenly need to get a term sheet ASAP.
2. Understanding the timeline. It’s very important to understand that fundraising takes time and you cannot wait until the last moment. It usually takes a lot of time. On average, it takes about 3.5 months to close a seed round (and that is when you already know who you are reaching out to). Many founders who have never fundraised before or who have gotten checks from friends and family, mistakenly think that the whole process is relatively short when dealing with institutional investors.
Just think about the time it takes to meet/get introductions to the right people and then to schedule the meetings. Investors are busy people and they travel a lot. It may take weeks to coordinate just the initial meeting alone.
Considering that everything is running smoothly, when you add the time it takes to go though follow on meetings (as in: meet the partners), go thought due diligence process, negotiate the investment terms, sign the term-sheet, AND get the money in the bank, a few months could have easily passed. And that is just one VC firm. Of course, you want to be talking with other investors simultaneously because you want to create a momentum and put some pressure on them that they will miss out on the opportunity if they don’t invest now.
Bottom line: you need to allow yourself enough time to go through the process. Don’t wait until you run out of cash. There’s nothing worse than being desperate when you are raising capital.
3. Being on the upside. You’ve got a good momentum going, your metrics are going up, you just brought a talented expert on your team, you got the first big client, etc. This is when you jump on the opportunity and raise money. You want to be fundraising when things are going well and not when you are struggling to keep the company alive. You want to say that you are doing phenomenal and will do even better with more financial resources rather than desperately seeking funds to stay in business.
It is really important to understand that you raise money not just when you need to raise money, but you raise money when you look very good and attractive. When things are going well, don’t wait too long. You’ve had solid growth for the last 3 months, that’s fantastic. Pitch that.
You wait too long - you might hit a plateau. What if your growth curve will slow down a little this month because it’s August and everyone is on vacation? You will no longer look as attractive for an investment. You run the risk of having missed a great opportunity.
No one will give you money when things are looking “meh.” You need to show that you are on a roll and that you are “killin’ it.”
4. Knowing all your options. For instance, there is such thing as a bridge round, which is probably what that founder who called me last week will end up doing.
A bridge round is basically when you raise a slightly less or greater amount of your previous round and avoiding valuation. It’s when you’re not quite at the next funding stage and need a little more time and fuel to get there. A small bridge round can be a life savior, because it can give you more operating capital (i.e. extend your runway) and give you more time to grow and attain the needed traction to raise a proper big round a few months later.
If you are a pre-seed startup, not quite at the seed stage yet (since what we consider to be Seed nowadays is progressively getting more and more advanced), try getting into mentor based programs or early stage accelerator programs. A good accelerator will give you the right resources to grow your startup at an accelerated speed and help with capital. Most importantly, you’ll be a part of a big support network, which will stay with you for the rest of your entrepreneurial career.
5. Don’t give yourself excuses. Just go out there and try it. You fail, you get up, you learn in the process. You change your pitch deck. You make it better. Don’t tell yourself that you need to wait until next month when you launch that new feature, or until you get that advisor on board, or that you don’t have enough this or that to show, and so on. Those are just excuses. You want to start early.
Also, don’t give up too early. Many first time founders give up too soon when the expected check doesn’t come the next day or when the first couple of investors they meet with turn them down. It takes time and it takes a lot of meetings. Pandora, for instance, was rejected 300 times by VCs before they were able to raise money right before the dotcom burst. Its founder Tim Westergren would not give up. (Source: http://www.businessinsider.com/pandora-vc-2010-7)
Oh, and don’t try to get a hold of investors around Christmas or late summer. They are on vacation. Keep that in mind. Plan accordingly.
Michal is the co-founder and COO of JFE Organization,a 501(C)3 non profit founded in 2009, with the mission to accelerate entrepreneurship among Jewish and Israeli founders. She heads JFE Accelerator’s East Coast New York office. Co-Founder @ JFE Organization; Co-Founder @ JFE Accelerator; Founder @Sanyok Gallery.