Friday, August 20, 2010

20 Questions To Ask Yourself Before Raising Money

As I mentioned in a previous post, some startups may raise money for stupid reasons.  Below are a set of questions I think any entrepreneur should ask herself/himself before raising a round.

Why Are You Raising A Round?  What Implications Will Raising A Round Have To You, The Entrepreneur?

1. Why are you raising money?  It is for vanity purposes or does your business really need it?

2. What would you use the money for?  Is the nature of the business ultimately cash intensive?  (Be creative - are there marketing, inventory, or other costs you are not taking into account?)  Calculate what money is actually needed (do a simple spreadsheet of costs and revenue projected out and see how long it takes to burn the money with various scenarios).

3. What are your goals as founders?   How will raising money impact these goals?

4. How do you maintain control of the company?

5. How much of the company will you end up with after N round of financing?  Calculate this in a spreadsheet.  Then run through scenarios - how much will your stake in the company be worth at the end of the day?  (VCs often say "if we grow the pie, we all win", but if you do the math of dilution vs market cap, that isn't always true for the entrepreneur).

6. How will raising this money impact future options for the company? (e.g. will a "Strategic" investment from Burger King decrease your ability to work with McDonalds?  Will the big venture round block your ability to sell for $50 million if that is your goal?)

How Much Money Do You Actually Need?  What Next Milestone Will The Funding Get You To?

7. What are the implications 6-12 months out of raising e.g. for a seed round $250K vs $500K vs $1 million?  (worth thinking through this very tactical point)

8. What milestone will the funding get you to?  Will this milestone lead to either (a) breakeven or (b) another round of financing where the value of your company is at least 2-3X higher then the previous round?  If the answer is "no", then you need to raise more money, cut costs, or do something different.

9. How do you avoid being over/undercapitalized based on the above (this is more important for larger rounds - e.g. big series A, B, C etc.)

10, How are other companies in the industry capitalized and what implications if any does this have for you? (sometimes this is misleading - e.g. look at all the facebook app companies that raised $ that are now languishing.  The flip of it is if your business is dependent on buying e.g. a lot of traffic, and your competitor raises a warchest to media buy, they could soak up your marketing channels)

11. Did you add 50% padding to the number you came up with to ensure you don't run out of money?

12. What is the macro-economic climate?  Is the economy growing/shrinking and what will it be doing in 6 months?  A view into this can strongly impact whether your company can raise money on better or worse terms in the future (or raise money at all, if the venture markets freeze as they do at the beginning of every recession).

Who Should You Raise Money From?
13. Are you a cash or equity business?

14. Are you goals impacted by venture economics?

15. What are future financing approaches you would be willing to consider?  When will this capital be needed?

16. What sorts of value do you expect the angels or investors to bring besides just cash?  Can you get this value otherwise (E.g. advisors)?

17. Are there alternative sources of funding you have not considered?  (Venture Debt, employees helping to cover costs, having customers pay you for development, etc. - blog post coming on this shortly).

What Do Potential Investors Want?
18. What do your investors or potential investors want?  What are their motivations and why are they getting involved?

19. What would you be willing to give up in order to raise the money?  Equally important - what is your walk-away point (BATNA) at which you would not raise money from these investors?

20. What is their reputation and how have they helped companies in the past?  How have they acted when other companies they invested in hit rough times, or got bought?

Any other questions I should add to the list?  Let me know in the comments section.