Entrepreneurship Series: As a start-up, when is the right time to seek investment?
If you’re starting a business, especially in the technology industry, it can be confusing to know whether or not to get funding. Is your business something outside investors can get excited about? Do you need funds for R&D, overhead costs, or other essential tools before you can expand? While it can sometimes be hard to know where, when, and how to acquire financing for your business, there might be more options than you think. If you’re thinking about Venture Capital, Fixed Rate Financing, Revenue-Based Financing, Angel Investors, or other options to fund your operations, here are a few things to think about when you’re considering your choices:
The Stage of Your Company
Big or small, all types of organizations need access to financing. Bootstrapping (running a company using only your personal financial assets or from the revenue it generates itself) can be a cost-effective way to test out a product or service before trying it on a large scale. Many companies bootstrap major expenses by choosing to work from home offices (reducing the spend on office space), getting tools and equipment at a discount, negotiating longer repayment terms, or by swapping or exchanging necessary supplies with other businesses. This works well for smaller businesses, or businesses in the earliest stages of development. If your company is resource intensive or needs money in order to hire or build a viable product, looking for financing is a good idea.
The Type of Business you Run
No two companies are built alike, and there’s quite a difference between a labor intensive manufacturing company that makes computer parts and a SaaS startup that caters to the financial services industry. While both of these businesses might need financing eventually, they’ll have vastly different capital needs, as well as timeframes when it comes to bringing their product to market.
If you’re building a physical product (such as a computer part), you might be able to bootstrap while you create prototypes, develop products, and set up an e-commerce site to sell. If your products are popular, but you don’t have capacity to meet demand, it might be time to look at financing options.
If you’re building a SaaS company, you probably have greater cashflow needs from the get-go. To take your company from concept to reality, you’ll be incurring expenses today in order to make sales in the future – this is especially true for having the talent skill and abundance needed to meet deadlines. Many SaaS companies consume lots of cash in their initial growth phases, and show significant P&L loss during that time. In the case of these kinds of businesses, debt or investment financing is necessary.
How Much Revenue You Earn (or Expect to Earn)
The amount of money you’re bringing in will help you understand how much money you’ll have available to fund expansion, growth, and research into new phases of your product. In the example above, SaaS companies often need greater infusions of capital during high growth phases because they’re spending money in hopes of future returns. This is an ideal situation for an investor or a lender, who hope banking on your idea can make them money too — if you’re short on cash now, but expecting plenty of revenue coming in later, it might be a good time to consider your financing options.
Whether you’ve only got a seed of a startup idea or a fully established business model, there are more options for financing your business then ever before. SaaS financing (such as revenue based financing, SR&ED financing, or venture capital) is a great way to fund your company’s next steps, entry into the market, or first big sale.
Stay tuned for our next article, which will break down the different types of funding to help find what best aligns with your business.
