When Should Startups Begin Raising Funds and How Much Should They Raise?

Are you in the throes of starting up a new venture? If not, are you considering it? Fledgling companies offer myriad possibilities that can shape our future. Every big business you know and love today had to start somewhere, but how well you navigate the complicated process of going from a small idea to an industry game-changer will either make or break your startup.

Startups need capital to execute on their plans. However, it’s not as simple as “I have an idea, now I need money.” The timing of when you solicit money from investors and how much you seek to raise requires careful consideration.

Don’t Raise Funds You Don’t Need

If your business got a loan for ten million dollars tomorrow, how would you allocate those funds? What is your realistic plan for paying back those funds?

What about equity investment? The less money you take from investors, (in most cases) the less control they will have over your company’s decision-making process. The more you are able to fund on your own, the more controlling interest you retain.

Fewer stakeholders means fewer voices in your ear. Being strategic about when your raise money and from whom will protect your ability to execute your vision.

Bring on Strategic Partners, Not Just Investors

What are you getting out of an investment? If you go to the bank to secure a loan, you are just getting money and debt. If you work with an investor who knows your industry and has the expertise you are currently lacking, you get money AND a strategic partner.

Startups can quickly crash and burn if the owners give up a large stake in the business without receiving strategic value beyond the cash. Consider soliciting investors with industry knowledge that can give you an advantage over your competitors.

Do Not Raise Too Much

Be careful with fundraising goals. Raising too much creates bad incentives to go too far too soon. Forcing you and your partners to expedite long-term goals creates a significant risk to the quality of work. This leaves the door open for mistakes that can not only destroy your business but leave you in insurmountable debt and/or ruin relationships with investors.

Large Investors May Try to Force Your Hand

Bringing on investors who provide significant funding for your startup comes with an expectation that these investors will have a say in how your startup operates. This sacrifice of control can take your startup in a direction you never desired or intended.

Make Sure An Investor is Not TOO Invested

Most investors have a high net worth that allows them to take risks when investing in small businesses. Be wary of investors who offer to invest a large percentage of what they are worth.

This investor cannot afford to lose money. Not only can this create tension, but it also makes it unlikely they will be a long-term investor.

Work with an Attorney

A law firm with an eye on the future of business law can equip your startup with the necessary tools to make good fundraising decisions. At CLARK.LAW, we have seen the pitfalls of raising too much or soliciting bad investors. Contact our data-driven law firm today and make sure your startup is making shrewd decisions from day one.

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