Entrepreneurs often ask, “when is the right time to raise capital?” Generally, they are asking about the best timing for approaching venture capitalists and/or professional angel investors for a new equity financing.
I think there are really only three answers to this question, though there are nuances to each answer:
- To accelerate growth: You are just past an inflection point for the business and could accelerate growth with additional capital. Relevant inflection points might be: you’ve assembled an all-star team that has developed a prototype product; you have your first paying customers; your consumer-focused web/app offering has gone viral (k-factor>1); or you have hit an important revenue milestone (such as a $1M or $10M annual run-rate). Depending on which milestone(s) you have hit, there should be a number of potential new investors for your venture. If you are not past a milestone, but can point to one or more customer contracts that will put you past a major revenue milestone if you can raise the capital to deliver on those agreements, that can work as well.
- To consummate a sale: You have a letter of understanding (LOI) or formal agreement to sell your company but need capital to fund operations to finish the deal. Note that a new investor will be harder to close than an existing investor in this case, but if there is a clear path to the exit and built-in returns for an investor in that event, funding should be plausible.
- It’s available at the right price: Sometimes investors call companies, particularly those that are performing well and are in the public eye, offering to write checks after a very quick diligence process. There is an oft-quoted adage that the right time to raise capital is “when someone wants to give it to you.” This is a reasonable assertion, with the caveat that it must be available at the right price and from the right people. Note that the right price does not necessarily mean a high price. Remember that most investors – certainly experienced angels or professional investors – will expect a certain return on their investment. If, for example, you raise capital at a $50 million post-money valuation from investors who target a 5x return (or more), your new investors expect you to seek a $250 million exit value or greater. If such an exit is your goal, by all means, take the new capital. If you would seriously consider a smaller exit, though, you probably don’t want to take the new money. The right investors are people that you want to work with. Take at least some time to get to know a would-be new investor, even if they are ready to get a deal done quickly.
The nuances might be a bit different if you are raising money from a source other than venture capitalists or angel investors, but the basic answers, I would argue, still apply.
Note that “because the business is running out of money” is not on the list. If you are running out of capital, therefore, your focus should be achieving key milestone(s) or getting to an LOI with a potential acquirer. If neither of these goals is realistic with the capital that remains, you should obviously be talking to your existing major shareholders about your options, including, perhaps, winding down the company and returning any cash that remains thereafter.
