The growth of your early-stage business is a full-time pursuit. While raising sufficient capital to realize your company’s full potential is essential, resist the impulse to be always–or too often–in fund-raising mode. Here’s why:
The time you spend on fundraising is time not spent growing your business. While this seems obvious, CEOs of early-stage companies almost always underestimate the opportunity cost of prospecting, preparing pitch materials, practicing pitches, meeting investors, and answering follow-up questions from investors. This is especially true for seed- and A-stage businesses that are learning to grow at light speed; our portfolio shows how just a few months of growth can change a business, its trajectory, and prospects for continued financing.
Poorly timed and protracted fund-raising exercises can cost you in three ways:
1. First, we know that multitasking is a fallacy.
We sacrifice our power of full presence when we're multitasking, and we do so for a perceived benefit of improved productivity that simply doesn't exist. Research indicates that multitaskers are actually less likely to be productive, yet they feel more emotionally satisfied with their work, thus creating an illusion of productivity. inc.com, Scott Mautz
Human brains cannot multitask; we are task-switchers. When we shift our attention from one task to another, there is a cognitive “switching cost.” This cost manifests as decreased focus, increased errors, and a longer time required to complete each task. We often think about this at the task level. However, multitasking costs also appear at the systems level, amplified by characteristics such as organizational design and remote workforces.
2. Second, we often see a self-fulfilling prophecy with founders who are overly conservative with their internal operating plans. They assume a no-growth scenario to forecast their cash-out date (i.e., runway length before their next raise). Most times, this results in a predicted need for cash much sooner than a plan that expects new revenue to increase the runway (decreasing cash burn) in the near term. The no-growth planning method stimulates a premature and often protracted fundraising effort, which diverts the attention of the company’s best resources, making growth less likely. So, we see that planning for no growth can guarantee that outcome. And this, of course, makes raising money even more difficult.
3. Last, if it appears to investors that you are always in the market, the opportunity to invest won’t seem scarce. You will struggle to create a fear of missing out among investors. Based on human hard-wiring for belonging, FOMO is a critical force in making a market. Without it, you may not produce a term sheet for your efforts; if you do, the valuation you earn will be suboptimal. A tight process executed relatively quickly will increase your odds of creating FOMO.
We recommend compartmentalization. Build your financial plan around reasonable expectations for revenue growth and decreasing cash burn. Plan to focus only on sales (and serving your new clients) until you are down to a six-or seven-month runway. Only then should you allow yourself to be distracted from your growth imperative.
When it comes time to engage in the fund-raising process, think in weeks rather than months. Spend two very focused weeks refining your pitch and pitch materials. Take another week to ensure that your financial statements and models represent your business with 100% accuracy. Add these materials to your data room, and then take a fourth week to make your data room comprehensive. Until you complete these steps, resist the temptation to meet with investors. Premature meetings are almost always counter-productive.
Confine your outreach to a structure and a relatively short period of about two weeks, during which you again resist taking meetings. It’s best to set up all of your initial meetings for a two-week sprint to achieve optimal focus.
You can then conduct all of your follow-up meetings over the next two to three weeks, after which you should have terms for an investment. All participants can complete confirmatory diligence and documentation in four weeks if you stay on top of the process, but allow for eight in your planning.
A process like this will create urgency and competition. This process's time-bound nature and efficiency maximize the time you spend growing your business, which is the ultimate lever in financing it.