When Should I Raise?
Originally posted on 12/18/19
Collin Gutman is a Co-Founder and Partner at SaaS Ventures, with over a decade of cumulative experience as both an investor and a startup founder. Prior to founding SaaS Ventures, Collin co-founded Acceleprise, the world’s first pure enterprise tech accelerator. Collin also has been an entrepreneur, having founded WorkAmerica, a social impact workforce development startup. Collin holds a BA cum laude from Yale University, and is an avid DC sports fan.
Entrepreneurs constantly struggle with the issue of timing their raise. The longer you wait, the further along the business will be and the better the price. But if you wait too long, the lack of capital can slow your growth and ultimate hurt (or kill the business, if you’re burning cash and run out of money). So the obvious rule is: leave yourself 4 months before you run out of money. Most rounds will take 4 months to close and running out of money isn’t an option — so this is an absolute must. On the flip side of the coin, if raising money isn’t going to dramatically increase the rate of growth, you probably shouldn’t raising money/probably won’t be successful.
If you’re not about to run out of money — either because you’re breakeven or simply have more runway but are considering raising to accelerate growth — then you have a choice and the notion of timing your raise becomes a reasonable question (again, assuming it will speed up growth). Previous blog posts have commented on the notion of an “inflection point” as the best time to raise, so here we’ll talk about the “three month inflection” as the ideal time to raise.
If your business is growing steadily (say, adding $100k/month in ARR on $100k in burn) then investors will want to understand why you’d need to raise if you have sufficient runway. The answer would be, of course, because we can grow faster. But in order for that pitch to be successful, you need to prove that you’re capable of accelerating growth. That’s where month 1 of the three month inflection begins. You can judiciously spend more for a month, and measure the results. If it leads to an increase in your growth, that’s when you go out to raise.
If you can truthfully say “we experimented with spending more and we grew faster, so we need to raise to accelerate growth to an even more exciting level,” you’ll have investors’ interest. Figure after those initial conversations, you’ll be having follow ups over a month. Investors will want to see that the inflection point was not a blip, but a trend line. So you’ll want to show investors that your increased investment is continuing to produce the same results for the second month. Month three you’re closing the round and passing due diligence, so you need to be preparing to accelerate post-close and showing your VCs that the recent hypergrowth is sustainable.
So the rule is actually fairly simple. If you don’t need to raise and are trying to figure out when you want to raise, align it to an inflection point. Find the right point in your company’s lifecycle to step on the gas, and if stepping on the gas looks like it’s working, go raise as part of your “three month inflection.” If you’re not inflecting and you don’t need the cash focus on business building and finding the ways to grow your business faster. If you don’t have a great case for raising money like “we’re inflecting and need to keep this going,” you’ll just waste cycles and hold the business back going out on the fundraising circuit.