Creating your product…it takes money.

Lately, I have been working with a startup that is building its initial prototype product with the help of some angel financing. As it often does, the question came up of…

When should we raise VC money?

When you raise your first non-seed/angel round depends on many variables, not the least of which is your current burn rate and the criticality with which you need it.

Some basic guidance…

Do it based on need — not NEEEEEEED!
Approach with care. Only raise the VC money (you are going to be giving up a big chunk of your “baby”, your company) if you know that you need to. The sooner you tap into the VC money, the more you will be giving up. If you are on a sound footing with the current funding you have, stick with it — the frugality you learn now will also benefit you as you grow, and be appreciated by all your future investors.

Desperately needing. When you NEEEEEEEEEED it, it may already be too late. The distinction I am making is that raising money should be based on a strategy and planning — not based on the fact that you will run out of money in a month and will crumble without it. With a plan, your needs are defined as tools that will facilitate your entering into new markets or accelerating the growth of your product. If you are desperate, everyone will know it, you will have to give up much more of you company (if you are lucky), or basically you won’t even get a chance at raising the money — who wants to bail out a needy, early stage, pre-product start-up??? Try your angels…if they still believe in your product and your plan.

Wanting. Also, ask yourself, do you need it or do you just want it? Pause now, think carefully. You have raised an angel round and everything is working very well. Everyone is getting paid, you are hitting your goals, you are about to start your alpha, your beta, etc. Why are you even talking about raising more money, from a VC, and not an Angel? If you are thinking about going to a VC to help you start building your product, before you have anything real to show for it, or because you want an even bigger money cushion than your Angels provided, for bragging rights, perhaps… then, think again.

Goal Driven. Raise VC money based on achieving goals: development goals, revenue goals, user base goals. Before you have a product, before you have revenue, your angels, your family, and your friends are the best ways to build and solidify your initial vision. If you are lucky, you will never need to raise VC money, and the angel funding and support was just the right amount to get the job done successfully. As you build your product and company, and work with your current pre-VC financing, never stop, and remember to …

Build, build, build. The more value you bring to any round of fundraising, the more capital there will be to raise, and the smaller the percentage of your company you will have to surrender.

Conclusion
Think carefully before you decide whether or not to raise Venture Capital. Do it based on product and company goals, do it from strength of product and positioning. And, once you decide to raise your first VC round, go all in, raise enough for at least 1 year of execution on your new trajectory that you hope the money puts you on — don’t skimp on your chances for success.

Good Luck!

Jeremy Horn

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