Sometimes coming up with the great idea is the easiest part. Then once you get the courage to strike out on your own, the real challenges begin. One of the most difficult aspects to starting a new business is when (and how) to raise money.
This week's reader question comes from A. Hutchinson and is answered by Hunter Walk, Partner at Homebrew Venture Capital.
Hello, I'm building a social media site. It's a big project, but I'm holding my own. I'm leaving my full-time job next month to work on it full time. Should I wait until I get a sizable amount of users and wait until I'm pushed for growth and then raise funding, or should I play it safe and raise some beforehand?
First of all, congratulations for deciding to go full time on your business—confidence and willingness to take risk are two qualities essential to any startup founder. I’m going to reframe your question a bit to focus less on should you raise funding, and more on what the funding will help you achieve.
When we’re making investment decisions at my seed fund Homebrew, we focus on what I’d call "milestone-based fundraising." The idea being that raising money should get you from one set of accomplishments to the next (and this continues until you are no longer dependent on investment capital).
Right now you’re probably at a phase of rapid learning and iteration, trying to build a product that a small group of users will love and use habitually. One strategy would be to raise the minimum amount of capital you need to get through this stage:
- Would being able to hire a designer help?
- Will your small-scale distribution tests require capital to fund?
- If someone invested $50,000 or $100,000 today, would it markedly change your plans?
If these answers are "yes," then taking on some capital from friends and family or angel investors could make sense. Raise enough to get you to your next set of milestones with perhaps a small buffer in case it takes longer than you expect.
You can always find investors to back momentum—that is, if you grow explosively, then money will follow rather easily. Financing decisions are as much art as science. Why do most businesses die? Because they run out of money. Your job as founder/CEO is to make sure this doesn’t happen.
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[Image: Flickr user Nikos]