5 Reasons a Young Entrepreneur Should Raise Outside Funding by Peter S. Cohan

TL;DR - One should raise outside capital when/if his/her startup cannot convert users to buyers; it lost a big customer; it is facing intense price competition; there has been a rapid change in technology; and/or it is looking to expand to new markets.

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Tags - outside capital, startup financing, raising capital, venture capital, VC

Questions answered:

  • When should founders approach venture capitalists?
  • In what cases should founders raise outside capital?

Summary:

  • If a founder needs to raise venture capital, he/she should start the process of talking to potential VC providers at least six months before he/she actually needs the funds.
  • A founder needs to raise outside capital when/if:
    • 1. The startup can’t convert users to buyers
      • If the startup is using a freemium model (offering free basic services and charging for additional features) and struggling to get any conversions, it will run out of capital.
    • 2. The startup lost a big customer (whom it was relying on for its revenue)
    • 3. The startup is facing intense price competition from rivals
      • Intense price competition puts startups in imminent financial danger; the startup can either hold prices and risk losing customers or reduce prices and watch its margin shrivel - either way, it will suffer lower cash flows
    • 4. There has been a rapid change in technology (forcing the startup to invest lots of capital in technology to stay competitive)
    • 5. The startup is looking to expand to new markets