This is amongst the most common questions I get asked. A young entrepreneur approached me with this exact question last weekend at the Unpluggd event. My response to her was, as always, “NOW!”
As an entrepreneur, it’s easy to get confused by all the conflicting advice that seems to be out there. It seems that when people pose the question “When should start raising money?” they get a variety of answers
- When you have a prototype
- When you can demonstrate market traction
- When you have paying customers
- When you [ fill in your favorite future event]
These answers clearly aren’t wrong. But they often are answering the question, “When am I likely to get funded?” and not “When should I start raising money?”
Fundraising, in many ways, is analogous to marketing and sales of your product or service. In this instance, the product is your team, company and business plan. So things we’ve come to accept and address in a typical sales process apply to fundraising as well.
Process or cycle Just as making revenue involves a selling cycle, raising money also involves a cycle, with its own elapsed time (typically 6-9 months depending on how big a round you are trying to raise, market conditions and of course your business and team). Which means the sooner you start, the better it is. At times you begin the process before you have a product or prototype (whether selling or fundraising) but in general, sooner you get out there the better it is.
Relationship-building Just as in a product or service selling cycle, you’re only hustling your offering – but building a relationship with your prospect. Ideally, you want the customer to buy more than once, you want them to buy sooner, at a better price. All of this involves a trust-based relationship. Fund-raising requires similar comfort and trust in the relationship, which requires more than one meeting – only time and repeated meaningful encounters, whether in person, phone or email is it built.
Risk Mitigation A first-time customer is taking a risk, when she buys from your startup – of course, this risk is usually finite and not life or job-threatening for most customers. In the case of a potential investor, they are taking a much larger financial risk when they choose to invest in your business. This once again takes time for them to understand your business and your capabilities to adequately de-risk investing in your business. Part of this de-risking comes from when they find you making steady progress from meeting to meeting (whether customer traction, product milestones or team building) – all of which takes time as well
Given all three things, the process, relationship building and risk-mitigation take time, the sooner you start, the better off you’d be.
To be fair, raising money poses its own set of risks – notably eating up time that you should be spending on building your business or distracting and possibly de-focusing you as you get varying inputs from different sources. You need to balance that with your need for capital and the timelines within which you need that capital. Happy hunting.