Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and the former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at email@example.com.
Q. How do you know when you are done bootstrapping and it’s time to ask for money?
-Founder of an early-stage social media platform
You know it’s time to ask for money when you’re confident your idea is working, you’re onto something big, and you will get a return for your investors.
Whenever you are taking someone else’s money you must be sure that you will not be calling them up one day saying, “I blew through it.” You may not think about it this way, but you need to regard this investment like a loan from the bank—you understand that you will be paying it back, with interest. You are not ready to ask for money unless you think you can return that money in a much bigger way. You should feel a big obligation.
So, what could give you a high degree of confidence that you’re worth betting on?
- Have you found that people like what you are offering?
- Do you have customers?
- How big is the space?
- Do you have traction that gives you hope?
- What have you done before? Have you built a successful business previously?
- Do you believe that you will be wildly successful?
Positive answers to those questions serve as good indicators that you are on the right trajectory. Additionally, before you ask someone else to invest in you, you have to examine how invested you are in yourself and your idea. Are you all in? Or, are you working full-time on something else and hedging your bets? Investors will want you to be fully committed to work incredibly hard for the foreseeable future.
Let’s assume you are onto something huge and you are well positioned to solicit outside money. But now it’s time to take a step back and talk about something more rarely considered—IF you should ask for outside money. If a startup is working, it’s growing and every day the company should be worth more than it was the day before. If you subscribe to this most basic theory, it makes sense to hold off on raising a big round until you really need it. After all, the more you establish on your own “pre-money,” the higher the valuation you can get later—and less ownership you have to give up.
Of course, in reality, this is always a delicate balancing act. I get it; bootstrapping isn’t always enough. An influx of cash allows you to hire more people, invest more in developing the product, and boost your marketing spend. It allows you to move much faster—and speed is like air for startups—they don’t survive without it.
Therefore, I urge you to ask yourself the following questions:
- Can you go as far as you need to on your own?
If you are doing well and have the cash you need to get where you are going, don’t take outside money. How much is that? At Webb Investment Network (WIN), we tell our founders to have 12 to 18 months runway, and the longer the runway, the better. It’s always better to fundraise from a position of strength. Remember, raising money is like accessing credit—if you are a good company a lot of people will want to give you money and you can and should be very selective.
- What’s the cost?
Entrepreneurs want to maintain control and as such, are concerned about dilution. Investors are looking for a fair deal and don’t want to overpay. Typically, seed stage companies give away between 20% and 30% of their company for the initial round of funding. You have to ask yourself: “Who gets the advantage—the founders or the investors?” Investors are exchanging cash to get a percentage ownership of a company because they are excited about your potential and your company’s future. Founders are selling a piece of the company, which is illiquid for a long time, in most cases. Exits take several years and IPOs in particular can take seven or more years, but if all goes right there will be a payday and founders are giving up a chunk by accepting cash from others.
Finally, you have to consider something else. As important as it is to get the money you need to help you grow, it’s more important to get the right people to help you grow. Picking the people who will help you most effectively is more valuable than getting money or getting the maximum dollar amount.
If you believe in yourself, and you believe in the people you are accepting money from, go for it and good luck!