Why You Should Raise Money Sooner Rather Than Later

‘Let’s delay the financing. If we wait two quarters we will close a couple of things in the pipeline and will command a higher valuation.’

The logic seems very solid. However, it’s usually a lousy idea. First, no one can predict the future. You may win two new key customers, but you might also unexpectedly lose two key existing ones. Second, if you are growing well enough to attract capital, the same “wait and get a better price” logic will still apply two quarters from now, delaying your financing in perpetuity.

Don’t Put Off Until Tomorrow What You Can Do Today

The decision on timing a raise comes down to your operating metrics, team dynamics and market opportunity. If you have a stable team, metrics within expectations and confidence in your market opportunity, the right time to raise money is now. Waiting on the round might save a point or two on dilution, but the medium term drawbacks are material. Investments in brand and new customer relationships require gestation time. Cranking down the investment level to stretch current cash may not impact next quarter’s results, but it will be felt 18 or 24 months from now, perhaps at a point when you are negotiating a sale or considering an IPO.

Your Competitors Aren’t Waiting

While you are running at half throttle, your competitors are hiring the people you would like to have. They are romancing the best channel partner in your category. Competitors may even be talking to your best people, who listen because they are frustrated by a lack of resources at your company. An investor you hoped to have lead your next round may decide to invest in a competitor. The other consideration is the external environment beyond your control. You can execute well but be victim to the impact of natural, financial or political disasters on the financing market. If the market is favorable and you have a credible plan, it is usually wise to take the money now and build your company.

There Are Exceptions

There are situations where a delay makes sense. The late-stage private financing market is the epitome of “never getting a second chance to make a first impression”. If there is a key issue that will skew investor perception, get it fixed before going to market. If you have an operating metric (particularly one related to cost of customer acquisition) that is an outlier, taking the time to work through that issue is wise. If you have material leadership transition to accomplish, such as exiting a co-founder or filling an empty head of sales role, get that done. If the market is in an October 2008 state of panic, buckle down and work with existing resources. Sometimes your target market has not yet developed: the maxim about ‘no difference between being wrong and being too early’ applies. If your market opportunity can’t be demonstrated, attracting capital will be tough and patience makes sense.

Boards Need Courage

Often the suggestion to shoot for perfect market timing comes from dilution-sensitive early investors, most often those who lack the capital to invest materially in the next round. I find it helpful to step back and focus everyone on the goal. For a VC to generate the venture capital return expected by fund LPs – one multiples above GDP growth or public equity return – company leadership needs to execute in a dramatically compressed timeframe. It’s a hard thing to achieve even with adequate resources. Delaying those resources increases difficulty from a mountain climb to a summit of Everest. All shareholders are better off long term taking today’s market price for capital and winning with execution.