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When should you start fundraising?
You can never start the process soon enough and you should never stop fundraising.
Early-stage founders mistakenly believe that fundraising is a point-in-time event. If they want to receive funds 12 months from now, they believe they should only begin the process just a few months out. This is far from ideal.
Trust takes time
Trust is the main driver of many early-stage investment decisions. Early-stage investments are inherently risky and typically involve a very light due diligence process. Deals are largely based on founder trust. Even early-stage company metrics can also be easily faked, so trust in the founder is critical.
But this trust does not get built overnight. Imagine two scenarios:
- Founder cold-pitches a VC requesting millions of dollars based on just a pitch deck
- Founder spends years getting to know possible investors, updating them on their progress, and eventually requesting money
The second founder will have a much easier time with fundraising.
Consider your current network, ask for intros, set up casual conversations, and start to build relationships that lead you toward relevant future investors. Most people won’t have direct contact with investors, but that’s why you need to start the process as early.
For most people, the idea of outreach & relationship building is not fun (you just want to build your business and product), but you’re going to have to do it anyway. So you might as well start now so your company can get more capital and less equity dilution.
Relationship building does not need to be your full-time job, but attempting to cultivate important relationships should be something you do periodically.
Generate Pull vs Push Based Investors
The best position to fundraise is one where investors proactively ask to invest in your business and not the other way around.
When you start the process early, you’ll be given the chance to meet with prospective investors and you'll be able to genuinely tell investors that you aren't looking for capital yet.
This does a few things.
- It builds trust because many people are clamoring for their money and your behavior is the opposite. This helps generate demand.
- You'll be able to periodically update them on your progress without asking for money, allowing them to see a track record of success.
When you do this, don’t be surprised when you have investors proactively offer deals to you even when you explicitly say you do not need or want more capital.
Personal anecdote:
At my last company, we'd just keep a variety of different investors and prospective investors updated on our progress. Through this process, we've been proactively offered additional capital multiple times. We elected to decline these deals because we did not need the capital, but it's clear that when we do finally need capital it will be there.
Capital is most expensive when you need it the most
The more you need capital the less leverage you have. While delaying the fundraising process to build your business further does make sense, if you delay the process too much you’ll be in the position where capital becomes urgent.
Once capital becomes urgent, you’ll have less leverage, a lower ability to have a level head during negotiations, and likely a worse fundraise.
You’ll be Ready for Hot Markets
Investor interest in different markets can swing rapidly. In 2021 crypto was king, but in 2024 it’s AI.
Some founders mistakenly think they can jump into a hot market and easily get funding, but by the time you realize a market is hot, it’s probably a bit too late.
If you just wait until a market is hot, you’re going to be competing against hundreds of other founders who think they have an easy path to funding in the new hot market.
Think about an example timeline in 2021:
- Notice the amount of capital moving into crypto. Maybe this takes you 3-6 months to fully notice enough to care.
- Try to build an MVP business that aligns with the crypto trend. Maybe this will take you another 3 months.
- Start building relationships with relevant crypto investors. Maybe this takes you another 3-6 months. But now the fad of crypto is over and you’re competing with many other start-up founders with newly founded crypto companies.
You should not build your business solely around what’s hot in the capital markets, but certainly if you wait to seek capital AFTER something is already really hot, you’re now competing against significantly more start-up founders.
Many don’t realize that the top fundraisers in their industry build relationships with possible investors before the market becomes hot. It’s just when the market becomes hot, they fully capitalize on it.
Conclusion
Most founders don’t like fundraising and they’d rather push it off to the last minute. This is not ideal. There are many benefits to beginning the process of building relationships long before you need them. You’ll have an easier time to fundraise, likely spend less time, and likely raise more money.
You’ll have to reach out to investors at some point anyway - you might as well start it now.
