Decide if venture capital is the right path, weigh it against bootstrapping, and use a checklist to know when you’re ready.
1. Should I Raise Venture Capital?
Probably not. Far too many founders rush to bring on external funding, seeing it as a shortcut to getting money into their business or making their startup feel less ‘fragile’. Many founders embark on trying to raise capital when their business isn’t ready (or even appropriate) for raising VC funding. The truth is that you really shouldn’t ever raise money unless you really, REALLY need to.
Here’s a short list of the most common reasons why founders want to raise capital, that also doubles as a handy list of reasons why they’re not ready to raise capital:
- Because their business isn’t making any money yet, and they want to build more features into their product in the hope of attracting customers
- Because they’ve been working on their business for a long time, and they want to start paying themselves
- Because they’ve got blind confidence that their idea will be a success, and they think investors will get excited about a high level concept
- Because they think that it’ll make their startup look more legitimate
- Because they want to pay someone else to validate their market for them
- Because an investor has recently shown a passing interest in their startup
Raising capital is not a mark of success or some sort of reward for all your hard work - it’s a target on your back. Any investor putting money into your business will have high expectations of the returns they’ll get, and how quickly you’ll be able to increase the value of their stake. At early stage, most investors want to see a 10-20x return on their investment within 5-7 years. So the $50,000 they give you today needs to be worth $0.5-$1m within a few short years, and all the pressure is on you to make that happen.
If you have an initial level of traction, you have some repeat paying customers and you have a vision for how your business could scale exponentially, then raising venture capital might be the right avenue for you. If you’re not there yet, you should focus on bootstrapping until you are.
2. VC vs Bootstrapping: A Quick Comparison
VC Funding | Bootstrapping | |
Ownership | Dilute quickly | Maintain full ownership |
Growth Speed | Rapid funded growth | Slower organic growth |
Pressure | High expectations | Founder-paced |
Control | Shared with investors | Full founder autonomy |
Founder-Led or VC-Backed? Making the Right Call for Your Startup
Ideally, you should only consider raising external funding when you have validated product-market fit, when you have some recurring revenue from initial customers, or when you have the opportunity to scale your business and need to automate processes to get that scale.
In some cases though, a founder will be unable to bootstrap - such as when they have a deep tech or manufacturing startup - and therefore there may be no option but to look for VC funding in order to get the business up and running.
Often founders find that whilst the ownership, growth, pressure and control is more favourable when bootstrapping during the early stages, the desire to make something bigger, faster and to really push their business as hard as possible leads them to favour VC-backing.
Something to Consider if You Do Decide to Raise
It might almost seem easier to try and get funding right at the very start of your journey, so that you’re starting with cash in the bank - however if you do, its highly likely that VCs will want to own a significant chunk of your business for that to be the case. They’ll hold all the cards, and you’ll be forced to take whatever deal they offer.
You should always look to raise at the last possible moment, when you’re right at the ‘rev limiter’ of what you can handle by bootstrapping. The more revenue and market traction you have, the better your negotiating position will be, and therefore the better your pre-money valuation will be.
Factoring in the Long Term
If you raise too early in your journey, you’ll likely have to give away too much of your business and then have to spend years in subsequent capital raises trying to balance things out and ‘un-dilute’ yourself.
Don’t fool yourself into thinking that you’ll just take an initial round of VC funding and not have to ever raise again. The reality is, that any VC will want to see you deploy their capital fairly quickly, at which point you’ll be back out into the VC market, looking to raise another tranche of capital to keep your business going.
It’s really important that you choose VCs who (more often than not) aim to provide further follow-on investment in subsequent rounds. Ideally they’d invest in you two or three times - rather than just the once. A single-time investor probably isn’t worth your time, so make sure you play the field, and find those investors that commit regularly to their portfolio.
3. Is My Startup Ready to Raise VC?
Raising capital is never as simple as just making a glossy slide deck and having a few chats with investors for them to cut you a cheque. It’s a lengthy process, and you need to be fully aware of the pre-requisites before you start. Raising capital requires a huge amount of effort on your part. It’s a full-time job for you for at least a few months, and so you need to be fully aware of how much of a distraction it will be for you and your business.
Capital Raising Readiness Checklist
Use the checklist below to self-asses your startup’s capital raising readiness:
Readiness vs Reality
Compare and contrast your self-assessment (left) and James’ reality check (below).
Often when founders assess their readiness, they skip over a lot of the detail, and instead just ask themselves ‘how do I make my business go faster’. VCs are very aware of this common mistake - and they’ll see you coming a mile away if you’re just trying to have them prop up your flagging business.
The key signals your startup is genuinely ready for VC are things like:
- Solid repeat revenue from multiple customers
- Positive customer feedback
- Large addressable market opportunity
- A product that either doesn’t already exist, or is a significant improvement on the incumbent solution(s)
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Part 4: How to Raise a Successful Round
