While some companies have bootstrapped their way to success, many entrepreneurs will turn to the investor community to help fund the growth of their startup. But when is the best time to seek investment?
There is no right answer to this question because it depends so much on the business. What stage of development has it reached? What sector is it in? How much investment has it secured from family and friends? An entrepreneur needs to consider all of these questions before approaching investors but they also need to decide whether they will be seeking investment pre-launch or post-launch.
The main advantage of seeking investment before launch is that you’re getting the brand name out there in advance; it’s always beneficial to get in early if your business is in a crowded market where there is a lot of competition. And even if no investment is made, at least the right people have acknowledged the business and are aware of it. Finally, it also gives founders the opportunity to network and build a rapport with potential future investors.
However, securing investment before launch can also dilute the value of a business. Ultimately it is difficult to evaluate a business that is not yet trading, which means it will be undervalued initially. This can be particularly frustrating as a founder, especially if your business does incredibly well after launching and you’re left with less equity than if you had secured investment post-launch.
For those entrepreneurs looking to secure investment pre-launch, it’s essential to have a strong idea and team. This will give investors confidence that the business will work and make money before they part with any cash. If you’re not yet at this stage, it’s better to hold fire as you could end up doing more damage to your reputation and, ultimately, your business.
There’s a lot to be said for a business that grows organically on its own. Not only is it impressive to investors but it also proves there’s a demand for your product or service.
My advice to a new business would be to grow as quickly as possible in this initial period so you’re in a much stronger position when it comes to seeking investment. This will increase investor confidence and give the founder more power and control in the investment process.
In my experience, more founders tend to maintain maximum equity ownership with post-launch investments than with pre-launch investments. However, it is important founders do not wait too long and underestimate how long securing investment can take. From pitch to closing it can take as long as six months. Getting the timing wrong can be very damaging to a business.