The best startups get follow-on funding offers even though they’re flush with cash. On the other end of the spectrum, clearly poor performing companies are unlikely to raise funding no matter how hard they try.
But what about the companies in the middle? What if your company is showing solid progress but hasn’t demonstrated the hockey-stick growth necessary to receive multiple term sheets and choose who you want to work with all in the span of a month? In other words, what if you’re part of the majority? When is the right time to begin fundraising?
I’ve seen early stage startups (raising their Series A or B) begin fundraising with 24 months of runway left, as well as companies that start looking for capital with 3 months of fuel left in the tank.
The companies that start fundraising too early often leave money on the table by foregoing the higher valuation they would receive after they’ve hit a few more product and traction milestones. In the fast-paced world of startups, a few months is often all it takes to build a killer feature or double your customer base. Unfortunately, investment offers are generally based on the startup’s performance when the negotiations begin and are rarely revised to reflect the progress that the startup makes by the month of the actual investment.
On the other hand, companies that begin their investor outreach with 3 months of runway remaining face the very real possibility of running out of cash even though they have investors interested in offering a term sheet. I’ve seen a company run out of cash halfway into its due diligence and need to take a bridge loan to survive until the actual investment date. While some investors can go from meeting you to wiring the investment in 2 weeks, entrepreneurs should prepare for the norm, not the exception.
With these experiences in mind, I recommend that entrepreneurs with early stage companies begin fundraising with 6-12 months of runway left. Here’s how I arrive at the 6 month minimum:
- The first 1-2 months ensure that you have the time to knock on the door of every investor with an interest in your geography and sector, while improving your pitch to each successive investor. The corollary to this is that you should save your most promising investors until the end so that you’ve perfected your pitch by the time you speak with them.
- Most investors will take at least another 1-2 months to get to know you and your team in successive conversations, while also researching your startup’s specific approach to the space before deciding on whether to offer a term sheet.
- Once you’ve received a term sheet, allow for another 1-2 months for due diligence.
As for the 12 month maximum, it’s designed to make sure that you’re not planning so far in advance that you leave money on the table in your final agreement. As mentioned earlier, an early stage startup evolves so fast that even the passing of 3 months can place the startup in a very different negotiating position towards investors. Allow for more than 12 months to pass and you’ll pretty much guarantee that this is the case.
Keep in mind that my recommendation to begin fundraising with 6-12 months of runway left is specifically for early stage startups looking for a Series A or B. Investment decisions and due diligence can take place much faster at the seed stage when there’s less data to digest and fact-checking to do. Similarly, they often take much longer for later stage companies with an established history, metrics, and transaction record. Entrepreneurs with companies at a different stage of their evolution should adjust their fundraising timeframe expectations to account for these differences.