For most startups, raising capital is necessary to grow bigger, faster, and stronger than your competitors’ product offerings. And while the argument for raising capital is quite strong, an equity round is not always the right answer. If you think you’re ready to pursue investors, you need to take a hard look at your business and make sure that the time is right.
If any of the following situations apply, you may want to think again before dedicating your energy to raising equity:
1. You have to focus on business operations
Raising equity is no easy feat. It requires a lot of dedication to research VC’s, build connections, develop an attractive pitch (and test it and tweak it then tweak it some more), pitch, and negotiate a deal. Doing all this will take a lot of your time and energy and can take you away from managing the day-to-day operations of your company. If you’re at a point where you need to focus on strengthening the bottom line of your business, it may not be time to hit up equity investors just yet.
2. Your path to profitability is unclear
While you don’t need to be profitable to raise equity, you need to know how you’re going to get there. If you’ve built a product but are still not sure who your target market is or how much your product is worth to them, you still have not achieved product-market fit. This means that you need to take the time and understand your customers and their true needs. You also need to set realistic expectations of your product’s value, the number of customers you need to acquire to achieve profitability, the time it will take you to get there, and the amount of money you need to invest in order to acquire these customers.
3. You’re not in a rush to scale
Scaling is an obvious goal for many startups, but it requires more resources such as staff, technology, and real estate if your employees are working out of an office, all of which come at a cost. And so, there is such a thing as scaling too fast. Your burn rate is how much money you’re spending every month. If you keep spending more and more to acquire more customers, your cost of acquisition might surpass your customer lifetime value. This can make your business model less viable and your company less attractive to investors. If it’s not the right time to scale, it might not be the time to take on extra equity to accelerate growth.
4. You don’t want to dilute ownership
When you raise capital, you’re essentially buying cash with equity. As your stake in the company decreases, your control may decrease as well. Investors want you to succeed and will support you in hitting your milestones. Having said that, early money is the most expensive money you’ll take in your company’s lifecycle and it can come with strings attached. If you think you’ll have to give away too much of your company to get the money you want, you need to rethink your capital strategy and consider pushing the equity round to a later date when you have more leverage.
Venture capital is not your only option
An equity round can open many doors, but you do not need to raise venture capital to build a great business. Finding the right time to raise equity is as important as choosing the right investor. If you decide that an equity round will have to wait but you still need capital, you will want to explore your venture debt options. Venture debt can provide you with cash in a very short time frame without taking your focus away from your business or diluting your equity.
If you want to learn more about venture debt, make sure you read our complete guide.