How do startups determine when the right time is to get funding? originally appeared on Quora - the knowledge sharing network where compelling questions are answered by people with unique insights.

Answer by John W. Mullins, best-selling author, 3-time entrepreneur, and professor at London Business School, on Quora:

There are many views on this question. Here are mine. The right time to consider external funding is when two conditions have been met:

  1. You've established that a repeatable formula for getting paying customers is in hand. Real sales, not your uncle or cousin, and not 'users' who don't pay, either. In other words, customer traction is proven, and the funds you seek to raise are to scale-up the business.
  2. You are concerned that continuing to grow your business without external capital is risky, due to imitation by others, possibly better-funded others. If you're doing something complicated and have a substantial lead, however, you may, as the wonderful Danish company Goviral did, be able to continue growing your business without ever taking venture capital.

For the details on the Goviral story (and their nearly $100 million exit achieved without VC funding), see Chapter 7 in my latest book, The Customer-Funded Business, or my Massively Open Online Course on Coursera, How to Finance and Grow Your Startup--Without VC. It's completely free of charge at https://www.coursera.org/learn/s....

In my view, most of the time, if you've not built proven customer traction, it's too early to raise capital (as your Plan A may well not work, which is not something you'll want to have to tell your early investors!). There are exceptions, of course, that prove the rule. And if you don't really have to raise money to grow, because your customers are funding your growth via one of the five customer-funded models, do you really want a possibly nave investor's nose under your tent?

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Published on: Jun 10, 2016