When to raise capital and the trap of the artificial timeline

Timing is everything – especially when it comes to raising a round of capital. My Founder Collective colleague Eric Paley and I discuss (and debate) it often. Here are some observations having been an advisor to two recent TechStars companies and co-founder to three start-ups.

Be weary of the artificial timeline

Both Brontes and Novophage are classic university ventures. They started in labs, later received university and government funding (Deshpande Center, BU’s office of Tech Development). Both companies went on to win or place in the finals of highly regarded business plan competitions at Harvard, MIT, Duke, etc. It seemed opportune time to raise capital, but the businesses were still not ready.  While business plan competitions are excellent catalysts for founding teams, and useful for gathering feedback, they do not ensure that a business is ready to launch (even so for winners/finalists).

Any process that sets an artificial timeline – expiration of government or university funding, graduating from school, a business plan competition or the conclusion of an incubator program does not inherently mean it is time to raise money. All businesses need to incubate at their own pace. Early market pivots, prototype development and building the founding team should generally happen on the founder’s nickel.

Fundraising = acceleration not inertia

All too often entrepreneurs approach fundraising as the start of the venture.  This attitude often leads to disappointment. A business should be operating as a regular business – with the makings of a culture, meeting routine and infrastructure (Novophage had 6 gigs of in its Dropbox before fundraising)!

Capital is invested to accelerate a business that has initial momentum but has reached a point where only money can get the company to the next accretive, and risk-reducing, milestone. VCs use the terms “traction” flippantly but in essence what investors want to see is momentum before the fundraising.  At Brontes, we needed a clear market focus (dentistry) and industry advocates before we were really ready for a Series A raise.

But strike while the iron is hot …

Having said all this, timing truly is everything. The investment community is momentum driven, just like the stock market. You’ve got to have a nose for when the timing’s right. A strong signal from a VC often suggests its time to talk to many and leverage the interest to terms sheets. If your segment is “hot,” find those pre-disposed investing actively in the segment you’re in.

In the end, the sequencing of fundraising often has a significant bearing on the outcome of the process.