When Are You Ready to Raise Investment?
In my investing career, I’ve often been asked what investors expect to see from an entrepreneur raising money, i.e. what makes a founder ready to fundraise. While different investors come in at different stages of a startup’s trajectory, there are some telltale signs that you are ready to accept funding at the early stages of your growth. These can be but aren’t limited to: minimum viable product, well-rounded team with the complete skill set, product-market fit, pilot projects or first customers.
Minimum viable product (in other words, a product with enough features to attract early-adopter customers and validate a product idea early in the development cycle). While some early-stage/pre-seed angel investors may invest based on an idea, this wouldn’t work for me personally. I expect to see at least an MVP which is a result of market research and conversations with future clients and, ideally, has been developed in line with lean startup methodology.
Well rounded team with a complete skill set. It’s a myth that you can attract great people into your team only once you have equity funding. What is more, you shouldn’t really go fundraising before you can demonstrate that you are the perfect team to take on the challenge at the core of your venture, at the ideal time. If you are a solopreneur it may prove difficult to raise funding. Importantly, the team isn’t limited to founders though, it includes other execs such as CTO or CFO, plus your advisors and NEDs.
Product-market fit. This means you have found an ideal, serviceable and obtainable market for your product and have proven that it is the case, ideally through sales. Achieving product-market fit is typically a requirement before you raise your series A. Even though you may still pivot (which is true at almost any stage), you are committed to a particular product development trajectory because you know it is going to serve the needs of your chosen market.
Pilot projects or first customers. Up until recently, I chose to invest only in startups that have achieved some sales already or, at the very least, completed pilot projects with early clients. This gave me confidence that the founding team demonstrated enough commercial hunger to make the venture a success in the longer term. Only recently I invested in a startup that wasn’t selling yet. However, they were in touch with prospective clients and developing the product according to their feedback which increased my confidence. It’s worth noting that different investors will look at commercial viability differently and for some, early sales aren’t necessarily a strong requirement. I come from a commercial background so I’m biased here.
Summing up, there is a whole range of factors, just a few of which I explored briefly above, that determine whether you are at the right stage to raise investment. A lot will depend on what type of funding you are looking to raise (pre-seed, seed, Series A, etc) and also on the viewpoint of the particular investor. One thing is certain: it is never too early to start building relationships with prospective investors. So, strike up a conversation, be useful if possible, keep them updated on your progress. Ask for advice rather than for money and chances are that if the investor is keen to get to know you better in view of potentially making you an offer, they will make their move.