When to Raise Funding as a Startup

We understand the challenges you face in growing your startups. One of the biggest questions you might have is, "When should I raise funding?" Many CEOs wait too long to raise seed or venture funding, which often leads to their startups failing.

We don't want that to happen to you.

Should You Raise Funding?

This might seem like a tricky question because all startups need funding. Whether it’s from your own savings, friends, family, or professional investors like angel investors and VCs, you need money to grow. So, the real question is, should you continue bootstrapping or raise money from investors?

Here are three steps to help you decide:

1. Is Your Startup Fundable by Investors? Most startups aren't fundable by professional investors. In fact, 95% of startups never take investor funding. Here’s what investors look for:

   • Can your startup generate at least 10x ROI in 5 years?
   • Is your startup in an area the investor is interested in?
   • Are you in a tech-friendly location? (This is less important nowadays.)
   • Is your product or service groundbreaking?
   • Are you, as the CEO, someone they believe in and want to work with?
     
     

2. Do You Really Need External Funding? If you can achieve your goals without outside funding, then avoid taking money from investors. It can create unnecessary problems. You'll be happier and have more control over your startup.

3. Are You Willing to Give Up Some Control? Taking investment means giving up some control. Investors will expect you to run your startup, but they will have the power to replace you if your startup doesn't perform well. Look at what happened to Uber’s CEO, Travis Kalanick, who was forced out by investors despite having voting control.

Are You Ready to Raise Money?

To raise money, your startup needs traction. This means having paying customers, not just users of a free version. The amount of traction needed can vary, but paying customers are essential. The more customers you have, the better.

Who Should You Raise Money From?

The amount you need will determine your funding source. For example, if you need to raise $3 million or more, you should have an ARR of at least $1 million. If your ARR is lower, say $100K, you'll likely need to raise smaller amounts from angel investors.

This means you'll need to be a lean-startup. Stretch your funds, pay founders less, and hire fewer people.

When Should You Raise Money?

Don't wait until you're almost out of cash. It typically takes around six months to raise a round of funding, so start at least a year before you run out of runway.

If you think you're too early, slow down your spending to buy more time. Raising money is hard, and there’s no guarantee of success. For every 100 meetings an investor takes, they might only invest in one startup.

Where to Go from Here?

Think of these points long and hard and decide on how move forward:

1. Only raise money if you truly need it.
2. Ensure you have enough customer traction, which means paying customers.
3. Start raising money at least six months, ideally one year, before you run out of cash.

We hope you find this information helpful. If you have any questions, feel free to reach out. At ShoutEx, we’re here to support tech founders like you.