One of the most frequent fundraising questions I get asked is: when should I raise money?
It’s a question that doesn’t come with a one-size-fits-all answer. So, how do you know when the time is right? The answer lies in a simple mantra that founders who have met me have heard me say:
“When you have a problem that money can solve.”
This response might seem overly simplistic or even a bit snarky at first glance, but it embodies a deep truth that every founder should internalize.
As a startup founder, recognizing the right problems that necessitate investment capital is crucial for steering your company towards growth and success.
It’s not just about raising money for the sake of it; it’s about strategically deploying those funds to overcome obstacles and propel your business forward.
Identifying the Problem; Highlighting the Opportunity
Before you can determine whether it’s time to raise money, you need to identify the specific problem(s) you’re facing and/or the opportunities that require additional funding.
Don’t rely on a simple pie chart showing the top-down categories that you intend to invest in with the capital you raise.
Instead, take a bottom-up approach and pinpoint the specific activities that require investment to unlock growth that will be hindered or prohibited without an outside investment.
One example is your need to be paid if you’ve been foregoing a salary while bootstrapping. If you’re successful at showing investors not only the why and why now, but also they why you, then your need to earn a salary to remain 100% focused is not your problem; it’s your startup’s problem. And, that’s a problem that money can solve.
So, how can you identify specific problems that warrant investment capital and what are the steps you can take to address them effectively?
1. Conduct a Comprehensive Assessment of Your Business
Start by taking a step back and conducting a thorough assessment of your MVP and product development roadmap, and your customer and market development strategy.
Avoid bringing your feelings to this data fight! Be sure you have market-informed data about the customers you are serving and their problem(s) you are working to solve.
During the early-stage of your startup, everything is in service of either product or market. They should progress in synchronicity.
2. Prioritize High-Impact Areas
Not all problems are created equal. Focus on identifying high-impact areas where investment capital can deliver the most significant returns.
As you prioritize, remember that customers don’t care about what you do; they care about what you do for them. The area we most often see under-prioritized is the rigorous process of identifying an ideal customer profile.
Without the laser-focus that an ICP affords you, it’s hard to determine what, if any, product development efforts to prioritize and which customer and market development activities will yield the best ROI.
Always prioritize areas based on their potential to drive growth and competitive advantage. Your ICP is your North Star.
3. Quantify ROI
Before seeking investment capital, quantify the potential ROI associated with addressing the identified problems.
If you’ve read my recent post about spreadsheets, not pitch decks, then you know that Excel – rather than PowerPoint – is the most effective tool to identify specific problems that are constraining your startup and the opportunities that additional funding can help you pursue.
Define clear objectives, milestones, timelines, and key performance indicators to measure progress and track the impact of your investments.
By constructing a financial model, you’ll gain a profound understanding of your business dynamics, including revenue drivers, cost structures, and the challenges and/or opportunities that outside investment can address.
4. Seek Out Feedback
Don’t hesitate to seek expert advice from friends, mentors, advisors, and others who can provide guidance and insights into strategic decision-making and capital allocation.
Their experience and expertise can help you refine your model and maximize the effectiveness of your fundraising efforts.
Conclusion
The decision to raise money should be driven by a clear understanding of the problems you’re facing and the opportunities that capital can unlock.
It’s not about chasing funding for the sake of it, but rather recognizing when you have a problem that money can solve.