5 Key Questions You Should Answer First
Raising capital is always a crucial part of your start-up journey – but before you explore your funding options, it’s really important you take a step back, and consider whether you’re ready to raise capital. To help guide your thoughts, we’ve put together a quick list of our top 5 questions you should answer first before you consider your first round of start-up funding.
Follow-up question: what’s made you think you need start-up funding? If your motivation to pursue your first round of funding comes from seeing other start-ups within your industry start raising, it might be best not to follow the herd.
Instead, it’s best you keep in mind whether or not there’s an opportunity to scale. If your business is seeing modest growth and you’re still trying to understand your audience and obtain product-market fit, self-financing over the short/medium-term may be a better option. However, if you’ve already achieved these milestones, or at least have some solid traction, and are looking to take the company to the next level, then raising capital to do so is a great idea.
Wanting to raise capital when your back is against the wall and you’re running low on cash is a natural reaction. But, the best time to raise capital is when you’ve already achieved solid traction, a good track record of growth, and you know the path you need to take to achieve the objectives that will grow your start-up even more. If this isn’t the case just yet, it’s worth exploring alternative funding options such as a Friends and Family round and start-up grants.
Before you seek out investment from venture capital funds, it’s crucial you think about whether your company is venture backable. Because of the high-risk associated with start-up success, VCs (especially early-stage investors) typically want outsized returns on their investments. To be able to do so, you need to be able to prove that your business has the great potential for scaling.
To see if your start-up is VC-backable, investors will also want to see some sort of track-record. Product-market fit would be fantastic, but if you don’t have that quite nailed yet, make sure there are some other measurable signs of traction e.g., user engagement, sales, traffic, subscriptions – this also ties into the importance of Question 2.
Raising a round typically takes around 6 months – which is a considerable time investment. So, before you decide to raise capital, think about whether you and your business are ready for that commitment – could it survive if you shift focus for half a year? Do you have the stamina to continue operating your business and go about raising? Losing stamina or backing out early from the process not only means time wasted but may also not leave enough time to pivot to alternative funding strategies
An exciting aspect of being an entrepreneur is the freedom to make your own decisions – but this dynamic changes once you receive external capital. After closing a funding round, you will have shareholders to report to regularly and likely have a board of directors composed of your investors. So not only will you then have to balance the interests of multiple shareholders, but also the guidance and advice they will look to give you.
After all, VCs provide more than just capital – they can also give guidance and open doors to a network of connections, so they often want to work with ‘coachable’ CEOs who are open to taking onboard their advice. So we’d recommend thinking about whether you’re comfortable with this first.
All in all, the reasoning behind your decision to raise your first round is extremely important if you want to successfully secure start-up funding. If you’ve already considered the questions and you’re certain this is the perfect time to raise capital, then be sure to take a look here for an insights into the things you need to consider once you’ve made the decision to raise.
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