Running a startup can be extremely challenging and founders often underestimate how much time and energy they will need to spend in raising money to make sure that they don’t run out of cash.
Most founders are well-equipped to handle the technical problems which they will have to deal with. They are confident about their ability to craft a better product, take it to market, and improve the technology in order to stay ahead of the competition. This is the stuff they enjoy, which is why they’re good at doing it. However, raising money is a completely different cup of tea. It’s not something which they’ve done before and it’s often not something which they ever get good at doing.
The problem is that you are advised to raise only enough money to last you for about 18 months because you don’t want to dilute yourself too much and hand out too much of your precious equity to investors. This means that you need to go back to the market every 18 months or so, in order to look for more money. If we assume that a startup is going to take about 8 years or so to reach maturity, this means you have to go out with a begging bowl about four or five times, until your startup starts generating enough money to be able to run on its own.
You also need to remember that raising money is expensive – both on a short-term basis, as well as in a long perspective. Thus, it consumes time and energy, and you have to travel in order to pitch to investors – many of whom will take perverse pride in yanking your chain. This is time you can’t really afford, because it distracts you from your core business of running a company which will create a product which will delight customers. On a long-term basis, by giving away a share in your company, you are diluting yourself, and this can affect your ability to control its destiny
You may feel that once you’ve raised money the first time, it’s going to become easier the second time, but unfortunately, this is not true. It can actually become more complicated, because you now have existing investors whom you need to pacify, and they may not agree either with you or with your new investors. These differences of opinion can complicate matters considerably!
Thus, your original angels may not get along well with your Series A investors, who may not see eye to eye with your series B investors, as regards valuation and liquidation preferences. You can read about these well-publicised conflicts in the press, who describe the sticky issues which larger startups have to deal with when they need to raise Series C rounds. The problems which plague early-stage companies are very similar (but not as well-publicised), because they involve fewer zeroes – and smaller egos!
The good news is that once you’ve raised a seed round, you at least have a working familiarity with some of the terms which investors use and you understand how to read a term sheet. You are better equipped to negotiate, because you’ve done it once. However, it’s not something you can take for granted because each negotiation involves dealing with a new set of investors, some of whom will have an idiosyncratic worldview and very different expectations. It’s very hard to keep so many people happy all the time, especially when their interests are not aligned.
This can get really stressful, especially when you find that you are running out of money, and need to raise a bridge round at very short notice. The fear is that if you don’t raise money quickly enough your company will fold, and all the years of effort which you have put in will go down the drain. You may be desperate for a cash infusion, and investors can sense this and will take advantage of it. This is why it’s so important to start preparing for your next fundraise well in advance – as we all know, the best time to raise money is when you don’t need it!
Finally, never forget, that the best source of funding are your customers and therefore you should focus on reaching cash flow profitability as soon as you can.
Read More : Inc42