By Rupert Jenner, founder and CEO at Playcaddy
Getting the timing right is absolutely crucial when it comes to running a successful start-up. While most business plans will include forecasts for product milestones, market penetration, and expenditure, based on the overarching questions of “What resources do we have?” and “How do we use them?” it’s still necessary for this plan to also include a marker for external funding.
Given that the acquisition of funding is usually the most important factor that will determine the success or failure of a start-up, it often gets surprisingly little attention in the company’s early plans. Often, there will be a clear plan on resource utilisation, which will include ample detail around the development costs and marketing expenditure, while the funding section will simply have a date which denotes the approximate time when the company will have expended its existing resources and will need external investment to continue growth. There is a propensity to both underestimate the resources required for seeking funding and to seek it at the wrong time.
Raising external capital requires a great deal of time and effort, especially for start-ups. For a small company, where the CEO is already stretched across a multitude of critical functions, taking them out of that day job to focus on raising investment can present a significant risk to the company’s development. Attracting investors to a start-up requires a significant investment of time. There are presentations, plans, forecasts, and other collateral to produce. There are events to attend, presentations to give and potential investors to engage with. This process can take six months or even longer to achieve, and requires a great deal of time and effort during that period. These all need to be factored into a company’s initial plans.
Then there is the timing of the investment. Raise money too soon and you may be compelled to concede a larger amount of equity. A great idea and a prototype is likely to garner less value than a great idea, a live product, and some revenue. However, in running your company’s resources too low while you drive your business forward to a more established and investor attractive position, you run the risk of running out of both money and time. Your option to say ‘no’ to investor propositions becomes diminished, and you may well find yourself giving up more equity, as you would have done had you gone too soon.
There is no simple answer to the challenge of investment timing, but problems can be mitigated with considered initial planning. Allocate realistic resources to your funding and set milestones for your product and market capture based on the remaining resources. This is both practical from a resource perspective, but also encourages you to focus on where your product needs to be to attract funding in the future. Proving one part of your product to a smaller market sector can be far more compelling to an investor than having a large multifaceted product, no remaining funds, and no customers.
Crowdfunding is continuing to gain traction as a viable route for start-up funding. This can be an attractive option for start-ups as it is structured to a limited time period. It still requires significant effort but that effort can be more readily quantified. Generally, successful crowdfunding involves less time than the more traditional Angel or Venture Capital routes and can be planned for more accurately.
Ultimately with funding, you are selling a part of your company. You need something to sell, you need time to sell it, and you need to sell it at the right time. Timings are crucial.