3 Signs You Know You’re Ready To Raise Venture Capital

October 11, 2017

Nowadays, it may seem really sexy to raise a venture round. You can tell your friends about it, post it on social media, and it gives off the perception of success. In reality, venture capital is a tool more than anything else. Even more importantly, it’s a tool for the right kind of business and a killer for the wrong kind.

In 2017, plenty of startups try to raise capital way too early in their life, which results in several challenges. From being a large distraction, to growing too early, to burning cash too quickly, venture capital has led to the death of many startups. Even so, if done at the right time, venture capital can unlock the next level for your startup and potentially a big exit down the line.

The question here is when are you ready to raise your first round of institutional funding?

There are several signs to know if a startup is ready to raise venture capital. Some are more obvious than others and many are specific to individual industries. Since every company, industry, and investor is different, we are going to cover tips that apply to all kinds of startups. Consider them evergreen tips. Here are three instances that prove you a ready to raise venture capital.

When Technology Is Hindering Your Growth

The whole point of a startup is to grow really quickly. Growth rate is what differentiates a startup from a small business. In the beginning, it’s more manageable to grow. Going from 5 to 7 customers isn’t as complex and resource intensive as going from 200 to 250.  There is a point when scaling that a company can’t grow anymore with their current level of cash flow. This happens often with SaaS startups.

A team of founders hack together a product that is good enough to attract early adopters, but not good enough to cross the chasm. If your startup’s small team or lack of resources are hindering your growth, it’s time to raise. If you don’t, you’re sacrificing your growth rate, which is one KPI not to be lenient on.

When Investors Are Reaching Out To You

If you have investors reaching out to you, you’re in a good position to raise. See, investors usually get pitched all the time and have a limited amount of time to focus on finding new startups.

At the same time, it’s an investor’s job to find the big hits so they can deliver excellent returns for their limited partners. When an investor sees a rocketship and they want to invest, often times the investor will reach out to the founders to invest. This is a great sign for the founders.

Whether it is because you have gotten to $20,000 MRR or have locked in 10 enterprise customers, you have made enough progress to deem an investor reaching out worth their time.

One investor reaching out is a nice, but dozens is even better. If one investor reached out, don’t think too much of it. If several are at a time, then you know you have something. When multiple investors are reaching out at a time, this also gives you leverage to get the best deal for you and your startup.

Do note, just because VC’s reach out to you about investing doesn’t mean you need to take their investment or even take their offer to chat over coffee. It just means that they are interested, so when you’re ready to raise, you already have inbound interest.

When You Have Found Product Market Fit (PMF)

According to Marc Andreessen, “Product/market fit means being in a good market with a product that can satisfy that market.” In a nutshell, it means you have built a product that is very useful to a group of people. Although it’s easy to confuse PMF with vanity metrics, if you have actually found it, then you are ready for venture capital.

The reason for this is that if you have found PMF, you have found a repeatable and scalable model. Think of it like a fire. You built the fire and it’s not going anywhere, but in order to grow it, you need to pour fuel into it. Venture capital is that fuel.

One issue with this is that many founders think they have found PMF before they actually do, which causes them to raise too early, leading them down the road of impending death. A good way to tell if you have found PMF is if 50%+ of your current base of customers would be really sad if you went out of business tomorrow.

Raising venture capital can be a daunting task. Many spend time pitching something that doesn’t have legs yet. With that said, if you find yourself in any of the positions above, you will have an easier time raising your first round of institutional financing. Good luck!

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