Recently, one of my clients was presented with some funding options and closed about $2 million in seed funding. This isn’t the first time I’ve worked with a company that was closing funding, and I’m sure it won’t be the last.
This gives me the rare opportunity to see the process from the top down. With a view that clear, some lessons rose to the top, and as with most lessons, they can be applied across the board. If you are looking to close $50K in seed or $1B in Series C, this is what you need to know:
1. Fundraising is a long, long process.
This cannot be overstated. Just because you have a great idea, and the investors that you’ve been talking to love everything and want to invest, it doesn’t mean that you’ll be closing quickly. 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’re talking with investors casually. They like your idea and want to learn more. Two to four weeks pass until you formally pitch.
- You have a formal pitch, and you absolutely crush it. One to two weeks pass while you negotiate valuation and potential terms.
- You get a term sheet. Awesome, you deserve it. Go sign it, and get paid. One to two more weeks of back and forth with legal to get the terms finalized.
- Close the deal. One to two months or so to work though the vetting, legal work and general run-around of the closing process. Welcome to due diligence.
- Get paid, and go build some more. One month hold on funds before the first traunch hits your account.
So in a perfect world, you have about three months from an excited investor to cash in the bank.
2. Pick one -- work or fundraise.
It is hard to do real work when fundraising. Most people will tell you that its possible, and it is, but they’re both full-time jobs, and you should be prepared for a massive hustle. If you’re starting this process, find some solid people that you can delegate to, stock up on coffee and start meditating, exercising, kickboxing or whatever it takes 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's not. You must be crystal clear and transparent on your goals and so must your prospective investor. If your goal is getting a positive cash flow, and your investor’s goal is to grow the user base to increase valuation for the next round, you have a problem.
It's 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.
4. Raising money isn’t 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. But don’t let this newfound cash flow fool you into thinking that your idea is valid. Paying customers and a healthy profit are the ultimate validations -- not funding, not tons of users, not explosive growth, not social shares. All those validate specific aspects of your business, but don’t guarantee a success.
Funded companies go under all the time. High-user apps and explosive growth SaaS companies go under all the time. Don’t 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, and 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 still exists. Make sure your execution plan is solid, and be prepared to adjust when you hit your first of many roadblocks.
6. Fundraising isn’t the only option, but it does open doors.
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 or formed internally within an existing company. 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 routinely recommend that some companies avoid funding entirely. It all depends on your goals and your business model.
Now, there is one big benefit to being funded -- it opens some serious doors. It means possible big media coverage, partnerships, co-branding opportunities, future investors, a mentor to help you grow and more. If you play your cards right, these can all be life changing. Not to mention 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 what about you? Should you seek funding for your app? Should you bootstrap your idea?
That’s a question that you should ask yourself 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 and definitely don't use it as a crutch that prevents you from starting. If it's what is best for your company plan, go for it! Seed funding or series A really does change how you run your business, but it is only one of many paths that get you from idea to reality.