Is it the Right Time for My Business to Seek a Capital Raise?
Nearly every scaling company reaches a pivotal moment in the business lifecycle where acquiring external capital is necessary to fund the business along its future growth path.
But such a decision cannot be made lightly. Not when it has the potential to either breathe new life into the company or sink the venture entirely. When success or failure balances upon a knife’s edge, the difference between growth and ruin is often simply a matter of timing.
So then, when is the optimal time to seek capital?
We discuss some of the crucial considerations below.
When Should I Seek Capital?
Although the pros and cons of capital raising depend on the specific source of the funds, generally speaking, it accelerates business growth in exchange for a loss of equity and control.
But the answer to the question of optimal timing is different for every business.
It’s not simply a matter of revenue or some other financial metric. Even for competitors with similar financial and business characteristics, the right time to fundraise for one entity may be the completely wrong moment for another. Some companies may be able to grow naturally without any outside infusion until later on, whereas others would have never been able to achieve their success without a capital infusion in the early stages.
Getting the timing right matters because—even with a great business model—raising money is no walk in the park. As Jeffrey Timmons notes in Harvard Business Review, it can be a costly, stressful, and time-intensive process that can drag on for months:
“Getting a yes can easily take six months; a no can take up to a year. All the while, the emotional and physical drain leaves little energy for running the business, and cash is flowing out rather than in. Young companies can go broke while the founders are trying to get capital to fund the next growth spurt.”
And then there are all of the out-of-pocket expenses to consider; the cost of lawyers, accountants, underwriters, regulators, and so on. Knowing this, you would better be certain that now is the right time to seek capital before you start entreating investors.
And since that answer is contingent upon the specific business, there are some general indicators you should first think about as you consider a potential raise, covered in detail below.
Do You Have a Clear Roadmap for the Future?
Before you ask for funds, you need to answer these three questions:
- How much capital do you require?
- Why do you need the funds?
- What will you do with them?
To attract investors, you’ll need a comprehensive business roadmap devised and ready to go that clearly answers these questions.
You need to know how much money you need, and how you will allocate the funds. Additionally, you’ll need to show your revenue numbers and a clear growth plan that is backed by data and market research. For that, you should prepare a business plan and your three financial statements—balance sheet, income statement, and cash flow statement.
Have You Established Customer Traction?
This is one of the more fundamental conditions that must be met before you consider looking outside the company for investment.
You need to establish and demonstrate proof that your business model works—meaning you have a repeatable strategy for reaching your target audience and then converting them into customers.
Essentially, the capital you are seeking should be the last input needed for your business to scale effectively.
But what if your business is only speculative?
In that case, you will then need to demonstrate that there is a verifiable market need for the product and service and that your company is optimally positioned to meet it.
What Type of Funds Are You Trying to Raise?
To raise capital, you need to have a clear picture of how much money you require and an action plan for how those funds will be allocated to help you achieve your goals.
But capital can also be raised from different sources, and you will need to determine the best choice for your business.
There are three primary ways a company can raise capital, and they each involve a different type of investor and outcome requirement:
- Revenue capital – Also known as retained earnings, this is the fundamental source of funds for practically any company. Ideally, it is the only source, as it utilizes the business’ net income left over after paid expenses and obligations. That said, few companies can reach peak growth solely through internal capital generation.
- Debt capital – Similar to an individual, companies can borrow money privately through a bank or a creditor. Alternatively, companies can fundraise publicly by issuing debt. With either type of debt capital raise, the business agrees to take on funds in exchange for repayment of the principal amount plus the interest.
- Equity capital – Equity funding involves raising capital through the sale of ownership stake via company shares—commonly to venture capital (VC) firms. Equity capital funding occurs over numerous progressive stages, which include:
- Pre-seed round for an idea but no product or service
- Seed round for the first round of funds based on a minimum viable product or working business model
- Series A to help bring the product to the market, acquire customers, and generate revenue
- Series B, C, D, etc. to expand your market reach, grow the business internally, and drive profitability
Even in the case of equity capital, the proper timing will depend on the company and its maturity. And some companies may need to undergo several rounds of funding, only need one, or return for more at a later date. So again, your fundraising efforts will be specific to your business needs.
What Time of the Year Is it?
If you are at the stage where actively preparing a pitch deck for investors is a top priority, keep in mind that capital investment is a seasonal business. Alongside business considerations, the calendar pays a part in determining your answer to, “When should I seek capital?”
Although a VC or PE firm may be hunting for potential opportunities throughout the year, there are peaks and valleys to deal review and deal activity. Therefore, the timing does not just need to be right on your end; it must also align with the period when investors actively review pitch decks.
But when is that?
According to TechCrunch, nearly 32% of all venture capital rounds will be distributed in Q1 between January and March.
As the new business year begins, everyone is back from their winter break, and capital pools are primed for distribution. Besides Q1, the next best time of the year is a September pitch targeting a December close. If you miss the window, it can be a long wait.
Hiring a CFO for Fundraising
Knowing when to seek a capital raise is just as important as knowing who to target for a pitch.
But what if you are searching for the right answer for either of those decisions?
This is where enlisting outsourced CFO services could be a tremendous boon for your business. By partnering with CFO Hub, you’ll be assigned a perfect-fit CFO who can help you identify the timing, place, and strategy for a capital raise—whether you’re looking to raise your first round or your company is further along in its growth journey.
So, let us help guide you from startup to offramp.