This is going to be a huge business

…is what many entrepreneurs say to themselves or their co-founder after a few months of hacking away at an interesting concept or idea. Building models in their spare time, talking to customers about their problems, and refining an idea into something that could be a real business takes time. It also is fraught with lots of changes to the idea influenced by the product, the customers, and the capital requirements.

Once that spark of an idea is ignited and the entrepreneurial team decides to launch an actual business there are all sorts of new things that they need to concern themselves with, from decisions around incorporation and ownership percentages, to how much of their savings can they use to finance starting the business, to how they connect with early customers and employees, and eventually all founders ask themselves, “when, where, and how do I raise capital.”

New entrepreneurs starting a business have loads to worry about, there’s plenty of great stuff out there about how to think about the founding of the business such as Steve Blank’s The Startup Owner’s Manual: The Step-By-Step Guide for Building a Great Company. When it comes to capital, like with all startup decisions, the business itself is what dictates the timeline for raising capital, the sources of capital, and the amount of capital. Just because your cousin’s friend from college raised a multi-million dollar financing round from a top VC does not mean the business you’ve built should as well. Maybe you shouldn’t even raise any capital.

The three rules of capital for new founders:

Structure your business capital in a way that suits the business model.

Align the type of capital your using with the type of business you have, can you easily afford debt or do you need capital well beyond your cash flow? Some examples…

Margin Distribution Cash Flow Capital?
High Margin Internet (broad/cheap) Slow Consider debt
High Margin Enterprise Sales force (focused/long) Slow VC Equity + Debt
Medium Margin Internet Medium Angel Equity

 

Raise capital during the window that best aligns these two things.

The circle on the left represents your business and length of time your business will need to be financed by investors before it becomes self sustaining. The circle on the right represents the market’s interest in investing in your type of business, will be patient for the natural life of the startup stage of your business, and seeking a return that fits your ability to return.

VennDiagram_RaiseNow

Raise capital from investors…

…who’s return on investment needs (in dollars or percentages) fits within the conservative realm of possibilities for your business. If you actually sell them 10-20% of your business, what would need to happen for them to receive 3x, 10x, 30x, or 100x their investment? Why is this important? All investors need to get a return on their capital.

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