Knowing when to seek funding, and when to stay clear, is one of the trickiest decisions you’ll face when scaling your business. While not every business will go through this process, the vast majority will, at some point, need to bring investors on board. Over the last three years at Voi, we have raised $325 million, and each time there were multiple considerations – timing, what we would use it for, investor appetite and how it would look to our partners and the wider industry.
Back to basics
The most successful businesses don’t live in the moment. They’re forever breaking down numbers to determine how they’re growing; forecasting how these numbers are likely to change over the months, years and decades.
This involves being honest about how much you think you’re going to make, and what you’re going to need to spend to reach your goals. Founders are ambitious by nature and it can be tempting to overestimate. By forecasting regularly, you’ll take the first step towards establishing not only when you think you’ll need capital, but also how much you think you’ll need.
When to seek funding
If your forecasts suggest you’ll run out of cash before the end of the period you’re forecasting for, or your margins are so tight that any dip in customers could put you in trouble, chances are you need funding. A good rule of thumb is having at least six months’ worth of fixed costs in your pocket.
Of course, unexpected events can change your situation overnight as we saw during early 2020 when many startups realised that their business model had been undermined by lockdowns. Funding, if you have supportive investors, could be the solution to your problems. Voi managed to raise funding during 2020 but to make it work in this situation, you’ll have to be super clear about how the business will eventually recover. For us, and for many other tech companies, the pandemic created a huge uptick in demand. Our investors appreciated that and supported our plans to invest further, to capitalise on this soaring demand.
Another driver is when you start hiring staff. When people are relying on you to provide their livelihood you have a responsibility as a founder to guarantee their wages as much as possible. This will likely require an injection of capital.
It’s also worth seeking funding when your ambitions require networks and knowledge you don’t have. Never underestimate the value of having like-minded investors buying into your vision and never be afraid to turn down a higher figure from an investor who you don’t think is a good fit.
If you’ve already got a buffer or if you’re in an industry where growth is notoriously slow but the value of this growth is high, then you can defer fundraising – sometimes for years. You should certainly never seek, or accept, funding if you’re only doing so to tick a box.
Bear in mind it’s never too early, or too late to seek funding. It’s why for every early-stage investor that exists, there’s a growth investor sitting on the other side of the coin.
So you need funding, what next?
Before you dive in, think seriously about the following: How much control are you willing to give away? Are you interested in going public, or selling your business down the line? Not all investors will demand early exits or hyper-growth, but you should be prepared to know where you stand on such demands.
Secondly, determine what funding options you have. Institutional investors are not the only sources of finance. Do you have a strong customer base from which to crowdfund? Would asset-backed financing be a better option?
Then, work out how much funding you need. There will likely be a figure you need and a figure you want. Both will be based on your realistic forecasting and you should always err on the side of the former.
No matter which route you take, remember funding isn’t a gift. It’s an investment on which your backers will require a return. Asking for too much, or being blindsided by offers that seem too good to be true, can be as detrimental to your business as not raising enough.
You can always raise more later if you need to. If you have a track record of accurately forecasting, and using capital as efficiently as possible, you’ll always be an attractive bet for investors. No matter what stage you’re at.
Build an investor network
If you don’t already have a network of investors, prioritise reaching out to the investors who have invested in companies like yours before.This will mean they understand the needs of your business, and also have direct experience from working with founders like you.
This is crucial if you’re in an industry where sales cycles don’t follow “traditional” patterns, or where standard VC benchmarks don’t apply. Unit economics are more important in micro mobility, for instance, than they are in other industries. When we were seeking funding, we needed an investor who appreciated the efforts we were making to enhance unit economics and make sure that we were using our fleet efficiently.
Ask questions and remember it’s a two-way street
If you’ve got a scalable business model built on realistic forecasting then you’ll be as attractive to an investor as they are to you.
This is where you ask the questions about their exit strategies, how much power they want to have, what their experience in your particular sector is and what they think they could bring to your business.
Raising money in itself isn’t a sign of success — it’s what you do with those funds that really counts – and the more questions you ask of yourself and your investors, the better your chances of succeeding are.