This third rule of thumb may seem to contradict the first two rules, but it is a very important discipline entrepreneurs should try to make a habit of. I say many entrepreneurs forget to do this, because understandably, when the company still has funds, people tend to get comfortable and neglect to focus on fund raising. But if each of us believes we do not have control over all the factors that determine the success of our company, then we know things can go terribly wrong when you least expect it. Mr Inderjit Singh – The Art and Science of Entrepreneurship.
There are two parts to raising money that you need to know.
We normally assume that we will be able to raise money as and when we need. The truth is that there are many factors that may not allow that to be true. We have to remember that investing is a business and that they have ups and downs too. There may be times where investors have just invested quite heavily and they are low on funds at the time you are looking for money, or they may have made a loss on their investments and have become more conservative, which will make them less likely to give you money.
Also there will be ups and downs in the market. Where because of market factors or downturns, investors may get weary of investing. So you will have to take note of such factors when looking for funds.
Many entrepreneurs forget about future planning as soon as they get their initial funding. They maintain an ‘I’ll get it when I need it’ attitude. The problem with that is we tend to forget until the last minute, to go look for funds. This is when you really need the money and are in a desperate situation.
This is where the problems start to occur. We like to think of investors as sharks (some nice, some not). They are always looking for the most out of their money. So if they see that you are in desperate need of money, they will try to wring you dry with very low valuations. They will try to take as much equity as possible for as little cash they can give.
If you raise funding earlier than when you really need the funding, you will be able to avoid such issues, as you can take the time to shop around with a few investors for the best deal.
Plan Ahead to Avoid Disappointment
A good thing to do is to plan your funding strategy ahead of time, way ahead of time. This will help you be ready for any good opportunities to pitch and you will also not run out of funds at the wrong time.
When preparing your forecasts, prepare a schedule for fundraising. Look into the amount of money you have at the moment, and how long it will last you.
For example if you have, $1.2 million but your monthly costs are $50,000 a month. That means you will be in need of money in 2 years time to move to the next level.
With the second rule we saw that we needed to keep a buffer, so best is to keep a half year buffer of funds. That means your funds will only last 1.5 years.
Since it will take some time to raise funds, the best time to start looking out for funds is after year one. Once you cross the first year you need to put your fundraising plans together and you need to start keeping your eyes open for the best opportunity to pitch.
By raising funds earlier, you are firstly not desperate, allowing you time to get a better deal and secondly you have enough money to keep the company running smoothly.
Sometimes a bit of planning ahead can really save you a lot of hassle and heartbreak. Take some time to figure this issue out and put it in your plans. Also keep vigilant on what is happening in the market and the environment around you. You may start ahead of time, but it is better to have more cash in hand than to be strapped for cash when you need it to most.