When should I raise capital for my business?

By Kathryn Haring - May 21, 2021

When should I raise capital for my business? How much should I raise? What investors should I seek out? Founders struggle with these questions all the time, but a structured self-reflection process can easily point you in the right direction.

The source and amount of your financing is determined by the long-term identity for your business. Are you content to focus on a handful of existing customers, or will you branch out into adjacent markets? Do you want to manage your business until you retire, or are you willing to sell the business to an acquirer or through IPO? The total size of the markets you will pursue determines what kind of financing partners you can work with, and the partners you choose can limit the certainty that you will manage your business to retirement. Venture capitalists want to work with founders who are targeting large markets (the typical minimum size depends on the fund) and who are willing to exit from their business over a reasonable timeline. What constitutes “a reasonable timeline” is constantly changing and depends on the specific fund you work with, but you should expect that the first VC check you take starts a timer of no longer than 15 years before you must sell or go public, often quicker. If your business is not going to pursue the large market opportunities that VCs demand, you are better off raising capital from friends, family, acquaintances, banks, the SBA, or other lenders.

Whether pursuing venture capital or another source of financing, have a plan for how you will spend the money. Make a list of the milestones that you need to achieve to take your business in the direction you want to go, then break those milestones into discreet steps that you can take. For example, you may set a milestone of achieving $5M in annual sales within 24 months. Depending on what your business already has available, you might need to hire a sales team, marketing specialists, or any of a number of roles to build out your company. The specifics of what your business does, who your customers are, and what skills and resources you already have available to you will all inform the appropriate timeline for you to lay out. A good rule of thumb is:

  1. Project the desired milestones over the next 5 years, typically in 6-12 month intervals.
  2. Define the steps you need to take over the next 18-24 months to get on track to meet those milestones.
  3. Model how revenues and costs will change over the next 24 months with the additional hires/expenses.

The amount of money to raise will be whatever additional plug is needed to make sure your business always has cash on hand to meet payroll and other obligations. If you are pursuing venture capital, you should expect to raise a new round of funding roughly every 12-18 months at which time you should evaluate your progress and whether the target milestones are still appropriate.

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