I have a tech company that received angel funding last year. We're on track with product development, but we’ll definitely need more capital to commercialize fully. How do I know when it's time to graduate from angels to venture capitalists for funding?
How about today! As the CEO of your business, capitalizing your company’s operations shouldn’t be considered a side project, but a major ongoing responsibility. You always should be networking with providers of debt and equity to match your company’s changing financial needs.
Related: Q&A: Choosing a Business Credit Card
Here’s the most important reason why you shouldn’t delay your outreach efforts. If this is your first entrepreneurial endeavor with “investor backing,” it will take a good six to 12 months to close a transaction with most seed and early-stage venture capital funds — that is, if they like what you’re building. Clearly, the earlier you begin your solicitation effort, the earlier money can land in your company’s checking account.
So, for example, don’t wait until you’ve completed your product prototype to start circulating executive summaries. VCs love observing progress as part of their due diligence review of a company’s operations. Tell them when you expect to achieve an important operating milestone, and then go do it!
Related: The Trouble With Crowdfunding
Another reason to start your solicitation effort sooner rather than later is to minimize the risk of running out of cash. I don’t know of many startups that keep to the financial projections they presented to first-round angel investors. Usually, their expenses are higher than anticipated and revenues are lower than anticipated.
Again, VCs are not sympathetic to entrepreneurs who don’t manage their company’s cash well. They won’t speed their decision-making timeline to accommodate a desperate, out-of-cash CEO or company. If anything, they’ll just further slow the due diligence process down. And here’s another form of punishment to CEOs who wait too long to raise funds for their companies: The deal terms you’ll negotiate with investors when you’re almost out of cash will be far worse than if you demonstrate leadership excellence by anticipating funding requirements long before your company is on life support.
So, it’s great that you’re on track with product development — act now to leverage that momentum when approaching VCs.