Startup fever is in full gear these days. Between the LinkedIn IPO, billion-dollar valuations, and enthusiasm in the investment community, there’s a lot of energy around entrepreneurship right now. These are exciting days for those of us running startups. Thankfully, the economic mood surrounding startups changed substantially from when we launched Urban Interns in late 2008/early 2009.
Confident in our belief that our business idea was timely (despite the economy), we launched our company and raised money during that time. Only about 10% of women-owned businesses receive angel-investment funding. Thus, as a business led by two female cofounders, we felt a particular sense of pride as we crossed that threshold and secured investment capital to grow our company.
As a result, we’re often asked for our advice on fundraising. People want to know how we did it and if we have any tips or success strategies for other entrepreneurs. While we do our best to share the how, we always start with the first–and perhaps most important–question: whether it is the right time to raise capital. The following three questions are a good starting point for doing the analysis with your business.
Do You Understand the Economics of Your Business?
By the time you start raising money, you should have enough data to validate that your business needs funding and the correct amount you should be asking investors for. The more you figure out by leveraging sweat equity in the early days, the better off you’ll be.
Keep in mind that you’re not just “raising money,” you’re raising a specific dollar amount, which you’ll presumably spend on specific items. Go ahead and sketch out what those items are. Do you need to rebuild a website? Get proposals ahead of time to understand exactly how much that web build will cost. Do you need marketing money? What marketing channels will you be using and what return you can expect on each?
Doing this exercise will lead you to one of two places. You could end up with a road map to show potential investors why you need money and what results you can expect. Alternatively, you may realize that the better path is to slowly invest in your company as you have excess cash available. You may also be able to barter for products or services that will support your growth. In either instance, you might decide to hold off on seeking external funding.
Can You Afford the Distraction?
Make no mistake, fundraising is a time-intensive process. You will likely be out hitting the pavement for months–not unlike the way you hustled when you first launched your business. The difference? Now you also have to run your business while you’re fundraising. And by the way, prospective investors don’t want to hear that you’re too busy fundraising to actually grow your business and will get back to operations at some point in the future. By the time you sit down with an investor, they want to see only your dream for the future as well as what you’ve accomplished to date. It’s a tricky balancing act between two very important directions.
Before you dive in, think about whether your business is at a point where you can afford to put the time and and energy toward fundraising. Are there multiple people on your team, between whom responsibilities can be distributed? If not, maybe now is a good time to hire some part-time staff to take over the day-to-day activities of running your business. Either way, be prepared to find extra working hours during this time. The key here is to make sure that committing the time necessary for fundraising won’t be detrimental to your business.
Gut-Check: Is a Funded Startup Right for You?
Before you get too far down the road of planning your fundraising efforts and your billion-dollar exit, make sure you’re not overlooking the realities of taking outside capital. Taking on investors often means selling a piece of your company. If your vision is to retain complete control of your business’s destiny, you may want to think long and hard before you bring in investors. If you want to run your business for the indefinite future, ramping it up and down at different times, then maybe taking on investors–who will expect a return on their investment–may not be right for you.
There is no question that many businesses need outside capital to grow and thrive. Additional funds can accelerate growth and the push the business to reach its ultimate potential. But raising money is not the only way to build a successful business, so before getting swept away with the hype, it’s important to make sure it’s right for you.
As Cofounder of Urban Interns, Cari Sommer focuses primarily on business strategy, marketing, and business development. She also manages the company’s public relations. In short, Cari spends her time trying to convince anyone and everyone that Urban Interns is a need-to-know resource for growing companies and job seekers.
The Young Entrepreneur Council (Y.E.C.) is an invite-only nonprofit organization comprised of the country’s most promising young entrepreneurs. The Y.E.C promotes entrepreneurship as a solution to youth unemployment and underemployment and provides its members with access to tools, mentorship, and resources that support each stage of a business’s development and growth.
[Image: Flickr user leoplus]