When is my start-up ready to raise capital?

You could go too early or wait until it's too late. Choosing the wrong time or the wrong reason to raise capital is probably the most expensive mistake you could ever make as a founder. While the best timing or reason is hard to gauge, doing nothing isn't usually viable.

Sadly, the simple answer to when your start-up should raise capital is it depends. There are many studies about what levels of investment or dilution you should accept once you get there. However, for now, let's focus on zeroing in on the why and how to help inform the when. 

So why might you need to raise your first external capital?

Reason #1: Resourcing 

If you can bootstrap AND it is not hampering your path to market, AND you can maintain an effective trajectory to an MVP or launch, by all means, do it. If you can pay your bills, put food on the table, and get your idea to the point of someone paying to use it, that is a good plan. 

However, the second that someone pays you for your shiny new thing, the game changes. From that moment on, be ready to devote your time to supporting them as a paying customer, and note that this will divert you from acquiring other new customers and keeping up progress on your product’s development roadmap.

Your responsibilities have increased, and you aren't resourced to support actual paying customers and run business as usual. 

There are many examples of businesses that make this mistake. We see it a lot in the early-stage funding market place as every "expert" shouts at you to get to revenue as fast as you can and to worry about the consequences later.  

This is fine if you don't mind burning those first customers. 

A more prudent approach is to treat your first customers as partners who help you refine and test your product. Embracing a beta phase should enable you to build long-standing relationships with those initial customers who give back with case studies and references to help you grow, as well as helping you to shape your offering.

Reason #2: Expertise 

Sometimes, capital is paired with expertise. It's not always only about the money. 

Don’t underestimate the power of having someone asking tough questions and forcing you to stay accountable. It is much harder to break a promise to someone else than yourself! While that could sound intimidating, the right partner won’t just ask the tough questions, they will also help you answer them, leveraging  their experience to help come up with creative strategies to overcome obstacles.
As a founder, you need to weigh up how the benefits of both external capital and expertise can manifest to accelerate your company's growth. Is your start-up in a position where you could benefit from a partnership guiding the best next steps?

You've identified why you need to raise capital, but how do you prove to others that you are ready for it?

If you are a founder with at least a PoC and some beta-type clients, but you just don't know how to scale to maximise your idea, you need to get out a pen and some paper. Work out exactly how much you need to get to a scalable MVP and customers who will pay you. Don't forget to include costs for supporting those customers.

A major inflection point in your valuation is demonstrating that your product has identified and solved a real problem, that there is a market willing to pay for it, and that there is sufficient value added to entice them to replace any existing solution regardless of potential disruption. You must be able to supply your product without a considerable increase in cost to supply; these basic business margins are easy to work through and will become the backbone of your successful drive to profitability.

The closer you are to proving your MVP and an addressable market that will pay for your services, the more prepared you are to negotiate external capital. If you can't show these things, prepare for a tough conversation about your assumed value. At this stage, thinking about your business needs and your ability to show your start-up's value will start to inform when is the best time for you to go for external capital investment.

Here’s a checklist to help you consider the points you need to communicate to potential investors:

Okay, you have your proof. When the time is right to raise, what is the best type of capital to go for? 

There are two very different sources of external capital, and it's important to know which one you need. Think back to the big drivers for raising capital discussed above. What are the needs of your start-up?

The most common form of capital in New Zealand is simply cash coming into your business for equity or as some form of debt, convertible or otherwise. There are many differing views about the value of this capital, and it might be that all you need is the money to get to market. In such cases, the equity you give up can be a precise value based on the dollars. 

However, if it is help you need, then selecting a suitable partner that comes on the journey with you to provide advice, support, and disciplines, as well as the capital, is a better path. It is hard to value such investments, but if such a partnership can accelerate your growth by 18 months, the value inflection is enormous. When capital comes with expertise, such as through an incubator, then you need to assess how much extra velocity you can obtain through having a professional management team alongside you and be ready for a rapid and exciting journey to scale. 

Bridgewest Ventures, our New Zealand-based incubator, is an example of what a co-founder team could look like for your start-up. Our programme supports our start-ups with capital investment and expertise to help you commercialise your technology, improve your business skills, and facilitate your company's growth to reach a global market.