Raising money for a startup is never easy

And by never easy we mean it’s darn near impossible. With fundraising, you have to get the investor to believe in you, your team, the market, and your solution. Additionally, the investment also has to fit with the investor’s philosophy and portfolio. Oh, by the way, you’re one of hundreds of companies trying to get the investor’s attention. Even the best ideas get passed on. There’s many famous examples. Airbnb was passed on 7 times before they got funding. Pandora was rejected over 300 times in its quest to get funded. Threadup was rejected 27 times. The list goes on and on.

Michelle (CEO of Roomzilla) and I got to talking recently about her experience raising money. Having worked in the startup world for a while, I thought I’d heard all of the advice on raising money. As we talked, we discussed all of the common advice that entrepreneurs hear. So I asked her what advice she didn’t hear that she would now share with someone. Two specific ideas really stood out. Not because of their power or depth, but actually due to their simplicity and what they mean about the company.

“If possible, it’s better to raise money when you want to scale, not be cause you *need* money.”

Raising money when you want to scale is very different from being in a position where you need the money.

First, it requires you to actually be at the point where you’re ready to scale. Getting from zero to one is an incredibly tough challenge. But if you’re at the point where you can scale, you’ve not only solved numerous business challenges, you’ve also greatly reduced the risk for the investor. From an investor’s point of view, they want to know what happens when they put money in. If you’re in scale mode, your pitch is something like this: “When we put in 1 dollar, we get y result. So if you put in 1,000,000 dollars, we’ll get 1,000,000 y result.” But if you’re still getting organized, solving unknowns, and putting out fires, then there’s a lot of uncertainty and risk for the investor. That results in needing to give up more equity.

Likewise, if you “need” the money, you’re in a weak negotiating position. That means the investor will get even more of the company AND they will likely think something is wrong with the company, which could kill the deal altogether. So, how do you solve for that uncertainty? One way is with experiments.

“Know specifically what you’re going to do with the money and how it’s going to change your business. It helps to run mini experiments as proof of concepts before hand.”

As I pondered this, it made sense. How do you know how much you want to raise unless if you know what you’re going to do with the money. Every dollar you raise comes at the cost of equity, so you want to raise as little as possible. But there’s even greater implications.

First, it forces you to really think about what will and will not impact the business. The investor is going to want to know where you’re going to spend the money, and if your ideas are based on running small experiments, it’s very easy to say “we did x, and got y, all at a small scale. So if we put in more money, we’re pretty certain the experiment will play out the same way.” Running the small experiments also gets you real data on which you can base your projections. That creates greater comfort for the investor. It also allows you to hit the ground running. If you know what works and what doesn’t, you’ll get results much faster. Once you raise money, you have eyeballs watching everything you do. By leveraging successful experiments, you get results faster and develop a greater confidence on the part of your investors.

While there’s many things you need to know in order to raise money, knowing exactly how the money will help and raising it from a position of growth and not need will help you to have a successful fundraising round.