How to Know When It's Time to Raise Money for Your Start-up
A behind the scenes of an advising call with Carolina Contreras
With all the info readily available on LLC Twitter, Clubhouse conversations, and endless courses, it can get difficult to cut through the noise and figure out which path to follow in your business. Sometimes, we need real-life context to process complicated concepts like growth and venture funding and see how other business owners strategize and analyze opportunuties. On this episode of WorkSmart, we’re pulling back the curtain and letting you listen in on a real-life coaching call.
Born in the Dominican Republic and raised in Boston, Carolina returned to the DR in her early twenties and opened a curly hair salon. After years of hard work, her small business began to attract high-profile visits while generating press buzz. With momentum behind her, Carolina knew she had to expand, so she picked up and moved back to the U.S. with hopes of launching a New York location. Cue COVID-19.
Where most people give up, even a global pandemic couldn’t stop Carolina. She used the newfound challenge to accelerate her international expansion and jumpstart her product launch.
Where Is She Now?
Today, Carolina knows she’s ready to raise capital but she’s considering waiting until after her product launches. Why? She believes her valuation will change dramatically when it does. But because this is WorkSmart, Morgan has an expert POV. So let’s dive in.
While Morgan doesn’t recommend venture funding for most small business owners, Carolina already has revenue, projections, and proof points. Not to mention, she’s an Afro-Latina business woman in a time when investors are eager to fund black-owned/minority-owned businesses. She can also start fundraising without making a formal announcement and use that money to perfect her team and her product before making the fundraising announcement.
While she doesn’t have to rush into fundraising, Carolina should solidify her core team, put a deck together, build out a financial model for venture capitalists, research her comparison companies, and then…ask for some money. The time is now!
Shift Your Mindset
Remember that every dollar you withdraw is a dollar you can’t spend on growing your business. So stay conservative, especially towards the beginning. Only take out what you truly need and invest the rest. And make sure your behavior with money falls in line with the goals you set for your business. In other words, balling out in the early days probably isn’t the best choice.
And above all, as you start to grow your business, always have a plan for how much in profit you’ll need to pay yourself the salary you want. Start goal-setting now and work towards it. Starting a business from the ground up is likely the hardest work you’ll ever do. It’s tough to prolong the paycheck, but when you do cash out, the money will feel that much sweeter.
As entrepreneurs, we love to overthink it. Take Carolina. When you’re like her and you’ve done all the hard work, there’s no need to reinvent the wheel for a couple of investors. So don’t come up with reasons not to do something, like raise capital, that aren’t valid or specific to your business. Oftentimes, you’re much farther ahead than you think and other times, you’ve got miles to go before funding feels feasible. Morgan will tell you straight either way.
Like most things in life, the right advice depends on you.
Remember: work smarter, not harder.
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Businesses similar to your own that can be used as a marker when highlighting financial figures, projections, and your overall business model to potential investors.
Parallel Process Production Line
Separating manufacturing steps so that they can happen simultaneously and, therefore, efficiently.
The estimated value of your company. Investors use your valuation to determine their stake in your company.
Stages of Funding:
Angel Funding (or Pre-Seed Funding)
The early, early stages of fundraising and a great place for businesses to start. Investors typically include close family and friends. Commitment ranges from $10,000 to $500,000. These funds help you pay for initial setup costs and scale your business as you’re evaluating your product-market fit and working towards a revenue growth milestone that will allow you to raise future funding.
Your first official round of funding. Here you’ve already set up your startup with pre-seed funding. Investors commit anywhere between $400,000 and $2,000,000. This funding can come from friends, family, incubators, or venture capital firms.
Most firms look for a 5-10x return on investment, so your number one focus should be growth. Larger, more infamous firms are looking for the next billion-dollar company and searching for a 100x return on investment.
Series A (or Early) Stage
A company has consistent revenue, an established user-base, and a go-to-market strategy. At this point, the company is likely searching for the early-stage capital needed to quickly scale.
Series B Stage
A company is past its early stage and has proven that it can scale. The company has an established user base and is likely growing internally.
Series C Stage
A company is past its growth stage and is likely looking to go public in the stock market. The company is successful and searching for additional funding to expand into new markets or acquire other entities.