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Nick StoffregenPrincipal

4 Questions to Ask Yourself Before You Raise Money

Despite the initial fears of an investor pullback in the first few weeks of the COVID-19 pandemic, startup financing has been white hot. 2020 set records in fundraising, and more than $240 billion in funding was poured into venture-backed startups in the first nine months of 2021, shattering the records already broken in 2020.

If your company has been on the bootstrapped path, you may start to question yourself. Or, perhaps you’ve been approached by a brand-name investor, and the temptation to take the money is strong.

It all begs the question: Just because you can raise capital, should you raise capital?

On the one hand, securing cash for a proverbial rainy day seems wise. You never know when the next downturn will come, and having the extra cash infusion could help you tackle product or market expansion plans that are otherwise much farther off. After all, a great investor could mean great resources and open doors, right?

Not necessarily. At Elsewhere, we are major proponents of “rightsizing” your raise — not raising more money than you have to. Even if investors are eager to write big checks, this is often a bigger reflection of their own dynamics, not necessarily what your company needs.

The same considerations come into play when you think about timing. Taking a check when you weren’t expecting to can introduce many of the same challenges that raising too much money does. So, before you raise capital, ask yourself these four key questions to ensure it’s the right move right now for your company.

1. Is fundraising the best use of my time right now?

An investor approaching you out of the blue to give you money is flattering. But what sounds too good to be true usually is. Not because of bad intentions, but because of the nature of the fundraising process. The investor isn’t giving you a gift with no strings attached; they have an investment and due diligence process, and by opening the door to the conversation, you are choosing to engage in it.

The problem is that it’s a time consuming one. You’ll need to create a pitch deck and assemble financials, both of which require input (read: time and effort) from your leadership team. As the conversation advances, that pitch deck needs to be accompanied by a data room, which needs to include detailed information on your revenue broken down by customer, hiring plans, product roadmap, and more. This requires — you guessed it! — more time and effort from the top.

When a fundraising process comes in out of the blue, it pulls your leadership team away from where their priorities for the company need to be, or it leaves them burned out as a result of taking on extra work. You may want to keep the potential fundraising news quiet among your organization, which exacerbates the capacity crunch on a limited number of key leaders. None of these scenarios are ideal.

Time and talent are among the most limited resources for startups, so to misdirect yours will cost you dearly. While it feels nice to entertain interest, you’ll want to carefully evaluate implications on your team workload and the cost vs. benefit of the effort.

2. How will I use the capital?

When raising capital, begin with the end in mind. Consider what your end goal is for the investment round. Go back to your roots as a founder: Where do you want to take the business? If you can’t clearly tell someone why you’re raising the capital in just two sentences, you’re doing it just because it’s available.

Taking on money too soon, especially if it’s unexpected, can upend the discipline that a bootstrapped company has carefully crafted around its burn, spending, and budget. In a bootstrapped world, you’ve matched your hiring and expenses to be on pace with your revenue. When you take on a sudden infusion of cash, you’re expected to spend it. And you’re expected to increase the enterprise value of your business - fast! It doesn’t do anyone any good if you leave the capital sitting on your balance sheet.

So, remember to begin with the end in mind. If you aren’t sure how you’d spend newly raised funds, ask yourself instead if you can stay the course as a bootstrapped company. Can you resurface with strong retention, higher revenue, and a clearer sense of the customer you're serving?

These are all elements that will help you command better terms and retain more of your hard-won founders’ equity value, rather than giving away too big a piece of your company too soon.

3. Is this investor the right one for me?

Let’s imagine the timing is right for a new funding round, and you have a very clear plan on how to use the capital. But is the name brand investor that approached you the best investor for you? Not necessarily.

We caution companies to prioritize highly relevant experience over star power when it comes to who you bring on your board. This means sector expertise relevant to your market and the operational resources to help you through this next phase of growth.

Another consideration is whether the investor shares your vision for an exit. The size of the check will be an indication there; for example, a $50 million investment will command a much higher bar for your expected growth and exit than a $5 million one will.

Be sure to also review the firm’s history. Are most of their portfolio companies on track for the billion-or-bust path, with a funding round for nearly every letter of the alphabet? Or do they work more closely with the private equity ecosystem? Working with an investor who expects a billion dollar exit while you’re trying to set up your company (and yourself) for a predictable exit in a few years’ time is a recipe for misalignment and heartache.

Though there is no one right answer to the best investor out there, there is a right answer for you. Be sure you’re raising capital from an investor who is aligned to your vision, whether it’s to accelerate growth or secure an exit.

4. Can I develop this relationship even though I’m not interested in raising capital?

Assuming you’re in a position to say no, doing so gracefully and professionally is important. The startup and investment community is a proverbial small town, and based on the advice above, you may be in a position to reach out again in a year (for example) when you are ready to raise.

This ongoing conversation can take a few different forms. For example, you can decline their interest and let them know you aren’t raising right now, but that you’ll keep in touch with regards to your progress. Or, you can add them into your marketing list for ongoing company updates or touch base when you’ve won an exciting new customer deal or released a new set of features.

After all, fundraising is about relationships, so taking the conversation beyond a transactional one could prove to be beneficial for you in the long run.

Evaluate your next move carefully

An investment check isn’t a gift or a donation — it’s an investor buying a piece of your company. The more your company is worth overall, the less of it you’ll have to give away to the investor. This is why the timing of your raise matters.

As a bootstrapped company, you’ve likely modeled your next 12-24 months of hiring and expenses based on sales of your software and services. If you’ve executed throughout, at the end of that period, you should have a more valuable company that will have an array of options and investors open to it. In other words, this doesn’t have to be a now-or-never scenario.

If you don’t need the money for your immediate runway and business operations, you’d be better suited to build your way to something more valuable. Then, you can come back in a year or two in a much different position at the negotiating table. You’ll likely have more potential suitors and partners, and be in better hands to choose your fate, without the chaos, pressure, and complications of an unexpected funding process.

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About the Author

Nick Stoffregen

Nick is a Principal at Elsewhere Partners where he co-leads investment efforts in infrastructure software. Previously, Nick was a software investor at Serent Capital and consultant at Bain. Originally from Indiana, Nick is passionate about bringing capital and operational expertise to companies outside traditional venture hubs.