Recently, one of my clients was presented with some funding options and closed up to $2 million in Series A. It is true that this is not the first time I have worked with a company that was getting funding, and even though this was not the most cash I have been involved with in funding rounds -one of my clients is close on pulling in 9 figure funding soon. Now THAT is a lot of money, baby. – there are still lessons to be learned. As with most lessons, they can be applied across the board. If you are looking to close $10k of seed or $1B in Series C, this is what you need to know:
1. Fundraising Is A LONG Process
This can not be overstated. Just because you have a great idea and the investors that you have been talking to love it and want to invest does not mean that it will be done “1-2-3.” If you are looking to close funding, make sure your cash burn rate is set to handle a long closing process. Let’s walk through how the process works in an ideal world:
- You are talking with investors casually and they like your idea and want to learn more. (2-4 weeks pass until you formally pitch.)
- You have a formal pitch and you absolutely crush it. (1-2 weeks while you negotiate valuation and potential terms.)
- You got a term sheet! Awesome, you deserve it. Go sign it and get paid! (1-2 weeks of back and forth with legal to get the terms in order.)
- Close the deal! (1 month or so to work though the vetting, legal work and general run-around of the closing process.)
- Get paid and build some more! (1 month hold on funds before they hit your account.)
So in a perfect world, you have about 3 months from an excited investor to cash in the bank. As we all know, we don’t live in a perfect world and generally this can be doubled unless you have some serious buzz around your company.
2. Pick 1: Work Or Fundraise
It is hard to do real “work” when fundraising. Most people will tell you that it is possible, and it is, but they are both full time jobs and you should be prepared for a massive hustle. If you are starting this process, find some solid people that you can delegate to, stock up on coffee and start meditating / exercising / kickboxing / etc. to keep yourself sane, relatively stress-free and productive through this grueling process.
3. Everyone’s Goals Need To Align
You would think that this is a given, but sadly, it is not. You must be crystal clear and transparent on your goals and so must your prospective investor. If your goal is getting to cash flow positive and your investor’s goal is to grow the user base to increase valuation for the next round, you will have a problem. I feel that it is best to lead with YOUR goal and find an investor that is either happy with your plans, can convince you why their goal is better or is willing to form a new goal that makes everyone happy – it is your company after all.
4. It Is NOT The Ultimate Validation
When you close funding of any level, you are telling yourself something along the lines of:
“This is the best day ever. My idea is great. Everyone loves it. I’m so awesome.”
You are partially right (You are totally awesome, and this may be the best day ever.) Don’t let this new found cash flow fool you into thinking that your idea is valid.
PAYING CUSTOMERS AND TURNING A PROFIT ARE THE ULTIMATE VALIDATIONS.
Not funding, not tons of users, not explosive growth, not social shares, etc. Those validate specific aspects of your business, but do not validate that it will be a success. Funded companies go under all the time. High-user apps and explosive growth SaaS companies go under all the time. Do not be lulled into complacency until your business is sustainable.
5. The Stress Doesn’t End When You Close
You may be thinking that all of this stress will melt away when you have some funding in the bank. Money that will pay your bills . Cash that will ease your suffering.
While it is most definitely true that the stress of fundraising itself goes away along with the stress of wondering how you are going to pay your developers next month, you still have work to do.
Enter: The stress of performing! Every single CEO that I have ever worked with feels this. The successful ones handle it with exceptional grace, but it exists. Make sure your execution plan is solid and be prepared to adjust when you hit your first of many roadblocks.
6. Fundraising Is Not The Only Option (But It Does Open Doors.)
So raising funds is the sexy thing to do with your company. Though, it is not the only way to run a successful startup. Many successful startups are self funded, bootstrapped, formed internally within an existing company, etc. so don’t think that if you can’t get funded that you can’t build a successful company.
Not every company needs to be funded to succeed, and I recommend that some companies avoid funding entirely. It entirely depends on your goals and your business model.
Now, there is one serious benefit to being funded: It opens some SERIOUS doors.
This means possible media coverage (potentially BIG media,) partnerships, co-branding opportunities, future investors, mentors and more. The only thing that is long-term is the mentorship, but the other stated benefits can be life-changing if you play your cards right. That isn’t even mentioning what a large cash injection could do for your company… let’s just say that things usually start moving lightning-quick after you close.
So…Should I Seek Funding?
That is a question that you should ask yourself all the time when you are starting your business. Maybe you should, maybe you shouldn’t… the choice is really up to you. If you want to go that route, you now know what to expect and please, don’t be scared off. If it is what is best for your company’s plan, go for it! Seed funding or series A really does change how you run your business, but it is only one path to get you from A to B.