Fundraising · Venture capital

What is best time for startups to begin looking for funding?

Stephanie Zhang International Brand Manager - Calvin Klein, HUE at Kayser-Roth Corporation

July 28th, 2014

For example, when a startup is bootstrapping it, you may come to a point when additional funding is needed to take the startup to the next level. However, by giving away equity too early can compromise your control over the company's growth and development. So when should a startup start looking for or receiving funding?

Devin Fee Director of Operations at Chiron Health

July 28th, 2014

Jonathan - I'm interested in hearing how you raised money. Did you already have a complete product?

As a response to the original question, many investors today don't believe in funding companies without real traction: a product and at least one customer. I recommend everyone read about what's happening on the other side of the table. David Rose's new book "Angel Investing" is a good place to start.

Anonymous

July 28th, 2014

Hi, Devin.

The simplest way to explain it is that we pitched to friends we already knew were investors (some of which said no immediately, which is fine), made use of existing connections to get warm intros to great investors, and so on. For example, the first angel to write us a check was actually an advisor to a startup I advise as well.

Yes, it is, in fact, very difficult to find an investor who'll fund you without a product, but that's fine, because there are many that will, if they understand your space, can see that you understand your space, and they like you (as a team, solo, whatever). We didn't have a product when trying to raise that first little round and we still don't yet, but our investors keep in touch, they know the progress, and they understand the complexity of the problem we're trying to solve (which is fixing how photos are actually organized and managed).

We also had a couple angels who didn't really understand our space offer us money (including one who is a very close friend of mine) and I made the difficult decision to say no, because I want everyone involved to really understand what we're doing.

So, as I said, as far as my experience goes, it really depends on many variables, but I'm sure there are many folks much more qualified than me who can answer this question.

- Jonathan

Phillip Mobin Founder and Chief Wish Maker at WishExpress

July 28th, 2014

Agree with Devin here.

1- Investors will embrace you when you don't need them.  a.  I made a conscious decision of building my current startup WishExpress so that it could bootstrap with no external injection.  It is built out of some money that we put into it ourselves and equity given to initial team members.  With some traction, investors will come to us especially since we don't need them to succeed.   b.  When I did jaxtr and raised $6 mil with August capital and showed unprecedented user growth (faster than skype), our series  B investor literally walked into our office with a $10m check and said would you guys consider it?  We did.

2-Plant early seeds.  If you don't think you are quite ready start talking to investors via personal connections, linkedin, angellist, whatever and start the conversation by saying you are here to show them what is to come and are not accepting investments right now as you foresee a much greater valuation some time soon.   Having a half dozen investor "followers" is good especially if you keep sending them progress emails.

3- Nothing like an offer from someone else.  Once you have done the above, try to get some kind of a terms sheet from one of the investors even if it is really lousy terms.  All you need to do is to tell the rest of them that you have a term sheet and you are considering it.   You will get n-1 appointments in the next 48 hours.

PS, my own plug.  We need a tech co founder.  We are launching in 6-8 weeks after 2 years of development.  Talk to me if you can code and feel good about running a team and get scaling.  We are 8 people now.

Bill Snapper Owner Principal at SammyCO, LLC

July 29th, 2014

I agree with Jonathan on this and it's from personal experience.  If you can avoid funding from family and friends I would avoid it like the plague.  I used to hear the saying "good money vs bad money".  It's true.  There is such a thing as "bad money".  MOST family and friends won't understand what it really takes to get a startup off the ground.  MOST of them might say that they understand this is a very risky investment but MOST of them don't understand the complexities that come with that sort of investment or that there's a good chance their investment could be wiped out with subsequent rounds.  MOST of them can't help you with strategic introductions and partnerships as well. This is what I call "bad money".

This just my opinion but I've seen it in a recent gig I was directly involved in as well as a friend's company.  His dad lost a lot of money investing in him and in that particular instance he (the recipient of the investment) felt personally responsible and obligated to pay it back.  He couldn't and it tore him up.

Anonymous

August 1st, 2014

Hi Stephanie, 

  I don't have time to read through the responses and other posts here, but to answer your question, you should start looking for funding at anytime in the process. On average, it has taken me around 45 to 60 days to raise capital for my start up clients. Some of the documents that they (lenders and capital sources) will want to see are 6 to 12 months of personal and business (if you have one, hopefully) bank statements (more for seasoning purposes than to see cash flow), personal financial statements, business pro forma, and a good business plan with a strong, viable exit plan. Preparing these documents is what stalls all entrepreneurs from getting funding. If you have any questions, feel free to email me at: info (at) amcapitalsource.com. 

  All the best, 

  Andrew

R. Douglas Hulse Co-Managing Principal at Select BioVentures, LLC

July 28th, 2014

A year before you need it.

Anonymous

July 28th, 2014

Hi, Stephanie.

I don't think there's a general answer for this question. It depends on your current situation as a startup, your needs, your milestones, and how to reach those milestones.

For example, for our startup, we started while I was working as a software developer. I'm the CTO and it became very difficult to manage both work and a startup, and it was also difficult for our CEO, who was doing her business major, to manage both school and a startup. We both wanted to do our startup full-time, so we stopped everything, began looking for funding in order to support ourselves and the startup full-time, and raised a little bit of funding. We've been working full-time since then.

However, on the other side of things, I have friends who have made enough money in their lives that they can support their startups until they need to start building a team and so on.

So yeah, it really depends on many variables, IMO.

- Jonathan

Anonymous

July 28th, 2014

I agree almost 100% with Phillip here, but I just wanted to add that not all products can be built and have traction without some initial cash. If your product can, then you're in a really good spot.

- Jonathan

Phillip Mobin Founder and Chief Wish Maker at WishExpress

July 28th, 2014

One very cheap way of getting intelligence about your product mostly for your own sake and secondarily for the investor sake is to do surveys.  Ya, ya, ya, they don't mean much but if you ask some clever questions, it may shed light on the appetite out there for something like this.  We had good luck offering $1 on task rabbit for work like surveys.  You can think about others.  If the survey is designed right, it will enable you to iterate the next one with better ideas/questions and do product definition as well as market validation.  Believe it or not, it may be the best thing you can put in front of an investor besides how big the market is and how deeply you are dedicated to the vision, etc.

Stephanie Zhang International Brand Manager - Calvin Klein, HUE at Kayser-Roth Corporation

July 29th, 2014

Thanks all for your insights, I am working on a "discovery commerce" online subscription startup and we are planning on launching it in the next month without any external investors. But we foresee needing funding when it is necessary for us to grow to the next stage. But great advice Phillip and Jonathan, it would be advantageous to start seeding with potential investors now instead of later.

Do you have any advice on fundraising from family and friends? We considered this, but not wanting to create any complications by mixing personal with professional relationships, we have held off. For example, when you fund thru f&f, do you offer equity or treat it like a loan?

Thanks so much again!