Tuesday, August 6, 2013

5 Reasons a Young Entrepreneur Should Raise Outside Funding

Many entrepreneurs cringe at the idea of seeking outside financing, as a deal will most likely require giving up control and equity. They want keep their business under lock and key and forgo investor scrutinizing their every move.

But there are times when you have to look outside for financing because you’re quickly running out of cash or your goals for your venture’s expansion exceed its capital resources.

If you need to turn to venture capitalists, don't wait until the last minute. Instead, you should start the process of talking to potential capital providers at least six months before you actually need the funds.

Here are five situations when you should kick into capital raising mode:

1. You can't convert users to buyers.

If you are a startup using a freemium model -- one that offers free basic services but requires people to pay for added features -- and you're not getting any conversions, you are going to hit a revenue wall. Depending on the rate at which you are burning through cash, most likely you will need to go outside to raise capital before you run out.

This situation can be tricky, as investors aren't going to want to put their money in a sinking ship. Do not approach those investors until you have a clear idea of how many potential customers might be willing to pay for your product, what price you can charge and the details of the additional features you’ll need to persuade future customers to pay.

2. You lost a big customer.

Big customers can cause big problems when they decide to cut ties with your startup. If your company is getting a big percentage of revenue from one customer and one day they say sayonara, you better act quickly.

When approaching investors, any potential outside capital provider is going to need to understand why you lost the big customer. You'll also need to explain how you are going to use that capital to make your business even bigger and more successful than it was before.

3. You have intense price competition from rivals.