The BizFilings blog covering business tips and trends.
When to Raise Investor Capital
Published on Jul 31, 2012
Read 'When to Raise Investor Capital' at 'Time to Start Up,' the small business blog by BizFilings.
Raise capital whenever you can
Many entrepreneurs are leery of raising investor capital in the early stages of a business, and for good reason. The more mature a company is, the less risk it presents to investors, which means the business founders can raise equity financing without giving up as much control to investors. However, the philosophy of “raise capital whenever you can” points to the fact that investor interest can be hard to spark and fleeting, so when a potential angel investor or venture capital firm expresses enthusiasm, business owners should take advantage.
Entrepreneurs should also keep in mind that the process of securing capital can be time-consuming, involving due diligence and negotiations, so a company that is not in need of capital when an investor first makes contact might be in a different situation by the time the money is in hand.
One pitfall of this approach is that interest from one investment firm can lead other investors to take an interest in the business, as well, so a company could get hot and attract a lot of capital prematurely. This can lead to the "wealth effect" observed during the internet boom, when firms awash in capital spent money on things like extravagant offices, while their spirit of innovation waned and they ultimately could not sustain growth.
Raise capital when certain benchmarks are met
It might be possible to secure capital at any stage of a business venture, but it is often easier - and ultimately better for smooth expansion - to time capital financing rounds with the achievement of certain business goals.
Benchmark No. 1: Product launch. Having a working product is obviously a key business goal, and it stands to reason that being able to show this product or prototype to investors will make raising capital much easier. There are some exceptions to this rule, as in cases of products that are extremely expensive to produce. However, especially because the advent of the internet has greatly reduced the costs of starting a business, many investors will not finance a company until it has reached this benchmark.
Benchmark No. 2: Marketing spend outpaces R&D. In this scenario, a business has developed a product and successfully introduced it to the market, winning sales and positive word-of-mouth through a solid business model. At this point, the burden of growing the business falls to marketing and sales. This appeals to investors, who can see a business at this stage expand very rapidly. It is also a good time for entrepreneurs to raise funds, as the maturity of the business means they can retain significant operational control.
Benchmark No. 3: Traction with a consumer base. This is similar to the previous benchmark, but it places a greater emphasis on consumer loyalty and enthusiasm. A business with traction is not only successfully selling a product, but is seeing repeat customers and is generating buzz through social media channels and the recommendations of early adopters.
Raise capital during the summer
Conventional wisdom says summer is the worst season for raising capital, because business slows down and many investors go on vacation. Although it’s true that many people go on vacation during the summer, that does not mean it’s a bad time to raise capital. In fact, summer may be the best time to raise capital, as the general slowdown in deals makes it easier to get a foot in the door. Patience is always called for when it comes to securing capital, but that can be particularly true during the summer. Investors aren’t the only ones who take summer vacation – so do the accountants, attorneys and all the other business professionals called upon during the due diligence and negotiation process. Because of this, meetings may have to be scheduled well in advance, and conference calls may be more common than in-person meetings. A business owner may also have to be more active in keeping the deal moving forward by staying in active communication with interested parties. However, once investors are in the room or on the phone, entrepreneurs might find them more relaxed and engaged than at other times of the year.
There may be no perfectly scientific way to determine the optimal time of year to go after venture capital, but those who want more data can consult the webpage of the National Venture Capital Association. The NVCA tracks VC activity, and its reports - which include market predictions as well as figures related to VC exits and VC investments - can provide an invaluable perspective on trends.