Most startups on the East Coast and around the world view raising capital as a top priority. And with good reason, you can only boot-strap your startup so far. Cash is almost always the fuel for growth.
But it is important to be strategic in your efforts to raise capital. Too little capital, or even too much, can create serious problems that will reduce your odds of success.
The startup community here on the East Coast is still in its early days. The same can be said for our approach to raising capital. (Disclaimer – this post is meant for startups in Atlantic Canada. For mature startup communities with much more abundant early stage capital providers, what follows doesn’t necessarily apply.)
There are lots of helpful funding programs for startups in the East Coast ecosystem, which are both a blessing and a curse. One of the adverse impacts is that we often see founders approaching the question of how much to raise from the wrong perspective.
They look at the local fundraising environment and base their raise on the funding they can pull from the various programs. It’s more about what they can get, rather than what they truly need to accelerate growth.
Build Ventures first investment in 2013 was $1.5 million. It’s no coincidence that the next 20 pitches we saw after that also needed exactly $1.5 million to take their company to the next level.
Let’s be honest – while we are making good progress, our ecosystem still has limited pools of capital. That means many startups in the region often end up being undercapitalized.
And being undercapitalized sucks.
An undercapitalized startup is simply extending its runway without enough resources to move the company forward in a meaningful way.
As a startup, you need to raise enough money to do one of two things: either get to cash flow positive, or get your company to a point where it can raise additional money at a higher valuation.
Most, if not all, companies we see at the stage where we invest, are in the latter camp. The key questions for that group are what do I need to achieve to raise additional money in the future? What does my company need to look like? What progress am I going to make in order to attract additional capital?
Once you have an idea of what these “financeable” milestones look like, you can work backwards to figure out the resources/cash/time you will need to get there.
It’s always a good idea to leave a buffer because this often takes longer and costs more than you expect. Then you have to hustle to raise the money before you ramp up your burn rate.
Expanding your team with a half-financed plan usually ends in tears.