When raising capital you want to time it so that your company has maximum perceived potential with a minimum perceived risk. There are 3 points in the company life cycle where this happens.
The first is just after having done the market research but prior to building the first product. Done right you have some form of market validation (MOUs, partners, trial customers) for your idea but no evidence against. Investors are excited about the prospects without the reality of a crappy product to bring them down.
One question is should you have a prototype of demo at this stage. If there is huge technical risk to your idea, like faster than light travel or mind reading, then you will need a proof of concept to put to rest the feasibility. Otherwise, don’t make a prototype at this stage. Confronted with a prototype, the rough edges and defects will only bring up doubts about execution or worse provide ammunition for why your idea sucks. When raising for Distil we had a first customer (great!) and the lousy work-in-progress product for that customer. Showing the early product really put a chill on our investor discussions. We didn’t get funding until after we stopped showing people our prototype and let the potential and customer validation carry the conversation.
The second ideal time to raise is after demonstrating product traction but before hitting scaling issues. At this point in the company the product is all potential. The problems of scaling will come later, but there is no proof that you won’t be able to scale. This is best time to raise funds — if you can get to this stage on your own then you are rocking it! Facebook timed this perfectly, hitting investors right at the time the site was taking off at campuses but before there was any problem handling the traffic. Remember the Twitter fail whale and the problems scaling to their traffic? As Twitter founders discovers, not the best time to be fund raising when your ability to meet demand is in question.
Finally, the third best window is after you have scaled but before getting significant market share. At this point you have the magic formula figured out and it’s only a matter of dollars to build the 100 lb gorilla. Few startups get to this stage but those which do command large valuations. DropBox is a great recent example of a company funding for world domination.
If you find yourself raising capital between these ideal windows, be prepared for a harder than usual slog and giving up more than you would otherwise. When you are in the middle of figuring out your product, figuring out how to scale your business, or figuring out how to go mainstream, there are countless examples of why you suck at that particular phase. Mistakes and shortcomings will be used against you.
What a your fund raising stories? Have you timed your funding right or come up short between these natural milestones? Please share your stories!