Startup Fundraising Guide - Ep. #1 - Timing

Hey everyone, I'm John Coogan and this is the first in a series of videos about fundraising. I thought it would be useful to share some of my experiences because as of September 2020, I've been involved in 10 different financing rounds. There's always an element of luck involved in fundraising, but there are a few patterns that should make the whole process a lot less stressful. If you follow them, I'm going to start every video with this same message. The best way to raise money is to build a great company. Full stop. You can be absolutely awful at fundraising and do everything wrong, but if your company is making its customers happy, growing the customer base significantly every month, and has a giant pool of potential customers, you will be able to raise money with ease. So before you focus on optimizing your fundraising process, make sure you have spent orders of magnitude more time optimizing your core business. In thinking about fundraising for your startup, the first question you should always ask yourself is whether or not you should raise money for your startup. It's very easy to look at funding announcements for startups and conflate fundraising success with actual success. Although the name of the game in venture capital is to correlate these two as closely as possible, the majority of venture capital investments fail to produce a positive return. Raising money for your company does not make your company successful. Rapid growth is what makes your company successful. Rapidly growing companies can often use outside money to grow faster, and because they are growing so quickly, the process for raising capital is often very easy. There are plenty of good reasons to not want to raise money. The most obvious reason is what you give up for that shares in your company. If you believe that your company is already on track to be worth billions of dollars and that additional cash in the bank won't help you get there, there is little reason to give up 20% or more of your company. Dilution not only affects your financial return, it can have big implications on control of your company. Once the founders own less than half of the controlling shares, big decisions at the company become much more complex. The second reason to hold off on raising money is that it can be a huge distraction. You can quickly get sucked into calls, coffees, and dinners that can take up most of your workday. This inevitably takes you away from your most important job, actually growing your company. Lastly, if you don't believe you can actually convince investors to give you money for your business, there's no reason to spend time fundraising. You won't just waste your time. You won't. You'll also hurt your reputation with that out of the way, let's talk about some of the reasons why you would want to raise money. The best reason is always that you've found something that's working, and having extra cash in the bank will help you scale the business faster. Selling shares at an early stage will dilute the amount that you own, so it better be worth it. You need to be crystal clear on where you will invest the money within your business once you have it to maximize growth. Another reason lots of companies raise money is that they simply cannot grow off of profits alone. It's never good to be in a position where you need to raise money because you'll be on your back foot in most negotiations, but it does happen in this case. You should always look at your business and see if there's a way to restructure to get to breakeven so you don't wind up raising money on onerous terms. Sometimes founders feel pressure to raise money because their competitors are raising money. This is completely natural since there is a real threat in some industries that the most well financed company will win. The feeling of being second or third behind a hot competitor with lots of funding can be disappointing, but highly capitalized companies often flame out, so try not to let it get to you. There are also other more rare situations where fundraising can fulfill a tangential goal, like forming a strategic partnership with a large incumbent that could lead to an acquisition, or providing liquidity to founders and early employees. But these funding rounds usually only happen at the very late stages of a company, so I'll focus mostly on examples where your company is growing rapidly and wants to expand. So once you've decided that raising money is right for you, how do you decide what your funding target should be? Again, the best methodology is going to be based on growth. How much money do you need to grow aggressively and hit a new major milestone for the company? You might look at what it will cost to develop a new product, or how much a sales and marketing push will cost. Ideally, money invested in user acquisition will turn into profits quickly enough that you won't need to raise a huge round of financing to hit your growth targets. But if your customer typically generates profit for you over a long period of time, this can be totally worth it. Internally, you might be looking at your current burn rate and plan on raising enough money to cover another year or two of expenses. That can be a useful metric for managing the business, but it won't get investors excited. No one wants to invest in a company that plans on stagnating between rounds so focus on growth. Other considerations that influence how much you raise could be tied to capital expenditures, R and D costs, or other industry specific investments that you plan to make. These are all edge cases that depend on the type of company you're building. Lastly, it's good to keep benchmarks in mind, since most investors will have those in the back of their heads at all times. It's common for most valuations to be between five and 10 times the amount of money invested, which is why 20% dilution tends to be a common benchmark for founders. This also varies widely based on the growth trajectory of the company, and there are always exceptions. Once you've decided that it's a good time to raise money for your startup and you know what your fundraising target is, the next phase is to figure out who to raise money from. So that will be the subject of my next video. Please hit the subscribe button and click the bell if you want to be notified when that video goes live. And if you have any questions or follow ups that you'd like me to address, please leave me a comment below. I try to reply to every question that I receive. Thanks for watching.