You have to be an opportunist.
The Entrepreneur Insiders network is an online community where the most thoughtful and influential people in America’s startup scene contribute answers to timely questions about entrepreneurship and careers. Today’s answer to the question “When is the best time to look for investors?” is written by David Steinberg, co-founder and CEO of Zeta Interactive.
It’s difficult for any startup to raise capital, but it’s a necessary step in the process of turning a concept into a profitable business. The current market is schizophrenic, with venture capitalists and private equity investors eager to pour money into the “next big thing,” while simultaneously showing extreme caution and pushing for better terms. After several years of heavy activity and high valuations, VC funding has declined in other parts of the world, and may slow in the United States. Plus, the dreaded “down round” has become more common for companies that raised capital when the market was at its frothiest.
I’ve started five companies and exited four with a combined value of almost $2 billion—not including Zeta—and all got funding from VCs and/or private equity. Most importantly, all thrived because of it, and my current company has been valued at $1 billion.
Finding investors isn’t easy, but it’s critically important. Whether you’re working with a major VC or trying to find an angel, your entrepreneurial success will be determined by your ability to raise money from the right investors.
Fitting a square peg into a round hole
The best time to raise capital is when you don’t need it, especially if you can do it during a down market. That gives you the opportunity to grow even faster and more efficiently, as there’s less competition for both people and assets. This is where being an opportunist is extremely important. Some businesses need capital when the markets aren’t open or aren’t necessarily looking for what that business is doing.
In this scenario, you have to fit a square peg into a round hole. But it’s these types of challenges that will ultimately define your success. At the end of the day, the most successful entrepreneurs and businesses have the tenacity and aptitude for risk. The ability to figure out the correct “square peg” for a specific “round hole” is an important attribute for all entrepreneurs. The aptitude to do this helps determine when the time is right to raise capital.
Understanding the current climate
Venture capital has changed significantly since my first startup in the early 1990s. In today’s current investor climate, it seems like seed money goes where Series A funding used to wind up and Series B rounds now take up what Series C used to. It’s a completely different game today, and it’s only going to keep changing. The pattern will continue, so it’s extremely important to cast a wide net and understand the current venture market’s temperature before looking for capital.
If you’re seeking your first external investor, the best time is often after you’ve established that you have a minimum viable product to show investors the value of your concept. Every round of fundraising should get your company from onset of accomplishments to the next, and this pattern should continue until you are no longer dependent on investment capital.
Building on past success
It is fundamental for entrepreneurs to meet private capital and private investors approximately 12 months before their business actually needs the investment to get it at the next level.
If you’ve got a growing company and you’re looking for capital, my theory is to always go out and raise it when you don’t really need it. When you don’t need capital, you’ll have the best ability to get it. Confidence and willingness will help you reach your next financial milestone with enough of a buffer to achieve it before it’s truly necessary.
The key is to show proof of concept if you’re a startup, and initial traction and/or profit potential if you’re already off the ground. Remember, investors fund the growth of your company, not what you’ve already accomplished. But your past accomplishments will be the key when investors decide if you’re worth the risk. There is no right or wrong time to approach an investor as long as you’re successful in attracting the investment.