Getting outside money will dramatically change the way you run your company. Are you ready for that?
Many entrepreneurs view raising outside angel or venture investment as a baseline requirement for starting their business – before they even write a line of code or bring a customer on board. An idea, a big scalable market target, a set of powerpoint slides and you are ready to go.
This has predictable consequences: You get told that the company isn't ready or that the market is too difficult. If you can make a great pitch you may end up making a 90 degree turn or going after an adjacent market rather than executing on the business plan you had in mind.
The alternative: Run as lean as you can and raise as little money as possible while you work to prove that your business model and product work. Doing the basic work of testing and tweaking your business model becomes a whole lot more difficult when you are sitting on funds that are supposed to be used to make that same business model come to life.
Here are a few questions to ask yourself to determine whether you should try to raise money:
Do you have customers, and do they like your product? Have your target customers tried your product, and how much do they like it? Will they (or customers like them) buy more? If not, can you get to the point where you do have paying, satisfied customers without going to experienced angel or venture investors? Most investors do not want to invest in science experiments. They want to see some kind of evidence that you’ve got a real business in the making.
Are you ready to execute, or are you still learning? Most investors will be focused on measuring how well you execute on your business plan. They aren’t particularly impressed by watching you innovate and brainstorm your way toward a business plan. Once you take money, you will need to execute, execute, execute. In the early stage of a company, this can limit much-needed experimentation.
Are you ready to raise more capital in 1-2 years? Your early investors are probably not funding you to profitability. They are funding you to reach specific milestones, and after you reach them, you’ll need to go out and raise more money. So what are your milestones? Are they well defined? Can you meet them comfortably?
Can you take advantage of investor involvement on your board? Investors will contribute to your business plan and help drive corporate strategy – from their vantage point as investors. They will naturally endorse execution and sales-oriented plans in order to drive a better return on their investment.
If you say no to the majority of these questions, you’re not ready to raise money. Avoid that distraction, and keep your head down until you’ve made more progress. Certainly, you’ll want to get feedback from friendly advisors, but don’t expect to raise startup capital from experienced investors until you have sorted out your value proposition, tested and validated it with customers, and are ready to define and meet established business-plan goals.
Remember, there are other choices. Bootstrapping is increasingly preferred for many early stage companies. “Lean” startup approaches are popular for a reason. Just as agile software development is driving more effective development, agile business processes allow you to efficiently hone your business plan. Test and iterate until you get it right, while spending as little as you can.
Most bootstrapped investors are also going to end up tapping some amount of personal savings or friends and family investment. Putting your own money – and that of your friends or family – to work is a focusing event in itself.
CAROL POLITI is the President and CEO of TRX Systems, Inc., the company that has developed innovated sensor and map fusion technology to deliver location indoors, underground, and other areas where GPS is not reliable. Ms. Politi is a Springboard Enterprises alumna and a contributor to "Been There, Run That."