by Mark Lauinger, SVP, Client Services, i2E
The questions of when and how to fund your business are associated with two important aspects of commercializing your startup. The When to Fund question is driven equally by the competitive environment of your market and where you are in development of a product to take to market. More basically, how fast do you need to commercialize the business and is there a market gap that is opening or closing? Competitively, are there major players in existence today or new ones who are closing fast? As company leaders it is important that you understand the actual stage of your business and act accordingly. Also, technical development of your product can drive your timeline for when to fund. A company’s strategy for selling and the associated capital requirements drives the speed of commercialization. Growth is a positive so long as organizationally you are prepared to onboard new customers and deliver to those customers the product they expect when they expect it. With many businesses, these onboarding capabilities come with a cost: people costs, process costs, materials costs or all three.
A prudent When to Fund strategy can be Ready, Aim, Aim again and then Fire. Start slowly and be measured in your initial use of capital. As the lead in your venture, recognize both the needs of your organization, your capital requirements, and the prioritization of those needs. Do not become self-absorbed and numb to feedback on these business drivers. When you feel confident that your solution is ready and your customer target is clear, that is the moment to leverage outside capital to accelerate your business beyond bootstrapping. Know your competitive landscape, know your needs and address them within the proper timeframe. As with many things in life, timing really is everything.
As far as the How to Fund question, this is one on which many entrepreneurs stumble. The reason is usually that they lack familiarity with investors and the unique lens investors use to evaluate and accept risk. Ventures must align the risk appetite of prospective funders with their own venture’s stage. At the early stages of a venture, it is likely worth as little as it ever will be. In this instance capital is expensive and dilutive (investors gain and you lose ownership). While founders often find this disconcerting, it is really essential to fund the initial growth of your company. There is a similar delicate balance here as with the When to Fund question, as undoubtedly if your company is truly a high growth venture, you will have to raise capital at some point in order to grow and be competitive.
Early funding options can be grant capital especially in the life sciences space, “sweat equity” or friends and family funding for technology ventures. Early stage, pre-revenue and pre-cash flow positive investors are willing to accept higher risk for the associated higher return. Those investors can be Angels, high-net-worth individuals, or institutional capital. Whatever you do, be efficient and prudent in how you deploy this precious and more expensive capital in the early days.
Be cautious to not over fund at a time when your venture is at its lowest point of value while at the same time not underfunding and starving your company of the growth capital it desperately needs to grow and be successful. As a company matures, additional funding opportunities become available as sales grow and the company moves towards the promised land of positive cash flow. As a venture approaches financial break even and becomes cash flow positive, banks may become a much cheaper source of funding. In short, find the right amount of funding from the right funding source at the appropriate time to propel your venture ahead of the competition.