When would be the right time to start fundraising?

Nveen Verma CEO & Founder at Creativforce

May 7th, 2015

We just recently did a beta launch and we are improving our MVP as we speak. Our development team is in India and we have managed to bootstrap our way into a decent product. Now we need to scale our back-end and set it up to a point where we can add large amounts of users and support e-commerce. We are have bootstrapped as much as we could and we will be in need of funds in the next 2-4 months and to improve our back-end. My questions are :

1. When should I go out and raise a fund? Would I be able to convince investors through a BETA testing?

2. Is there are any good resources to obtain beta users in a certain city?

John Seiffer Business Advisor to growing companies

May 7th, 2015

It's been my experience that customer growth is more critical than a back end than can scale. Maybe you should focus on that first. For one thing it will bring in revenue so you may be able to continue to bootstrap. In any case it will make it easier to raise funds from investors if they can see traction in the market.

So the best time to raise funds? After you've proven a scalable business model which means:

You know the cost (in time and money) to acquire a customer
You know the payback period - when will the gross profit from the customer cover the cost of acquiring that customer
You know the lifetime value of that customer (in gross profit and time)
You have some good data on an exit that shows what return investors can expect and when.

Note that much of this info can be gotten using customer development techniques that often don't cost very much.

Anonymous

May 8th, 2015

Nveen: I conducted a series of interviews with angel investors and venture capitalists and I asked this question: "When would it be appropriate for a startup to seek investment from you?".

My hypothesis was there would be more than one answer which I validated.

Some will invest pre-revenue, some will invest when you have a few beach head customers and others will invest once you are generating revenue consistently. The interview series is with 15 angel and venture capitalists.

An ebook will be coming shortly once I've lined up some sponsors. I'm happy to share the link if you connect with me directly. I was unable to leave a link that worked in this comment.

Manav Chaudhary Healthcare | Consumer Experiences & Journeys | Analytics | Start-ups | Mentor

May 7th, 2015

Nveen: I agree with John on the first two points given the stage your in. You must show that the product has a decent traction (and would get more customers in short-term with X amount of marketing budget). You should also be able to calculate cost of acquisition / contribution margin calculations which would go into your projections and financial modeling. Very important from investor perspective. They usually prefer a product with minimal features + solid customer traction. Adding more features / improving the performance can always be done with more money - easy part. Securing customers is challenging.

How many users you have secured until now? How quickly? And how have you secured your users? Do you have a very tightly defined target user segment? Have you tested your revenue model as well? What has been the usage of your app amongst the testers? Is it trending or not?

Are you looking for big amount of money? Then it won't be alone for just getting more server space / hardware or database space. You are looking at marketing + improving the infrastructure + expanding tech team + mgmt team etc. So you would need to explain all that to the investors. So getting users on-board at this stage (and loads of them) would answer many critical questions for investor quite convincingly.

Which city are you operating from in India?

Madhu Chamarty

May 7th, 2015

Just to add another perspective (and slightly tied to what Alan Matthews said earlier) - I would recommend talking to investors as early as possible. Keyword here is 'talking'. Getting money from an investor is only part of the challenge; finding the right investor that will stay with you at various critical stages of growth, stay patient and not push you down rabbit holes, or ask for quick returns, etc. is important. You are really looking an all round partner. This is like building a long and fruitful long-term relationship.

So, start socializing your idea to as many people as possible, including investors. Share not only what you have now, but also the underlying broader vision. Companies frequently pivot, and seldom end up with the starting idea in a few months or a couple of years after founding. Sharing your broader vision / pain point / addressable mega trend will help a potential investor see why they should work with you / your longer-term potential. In the early stages of a startup, you (or any other founder) have very little to show in terms of actual work, so sharing what you are looking to do will help. Talking to investors to get their thoughts for investment 'at some point in the near future' is tremendously helpful. Some conversations will remain conversations, while others lead to fruitful guidance, while a couple might lead to actual funding. So, start talking to investors just to get their thoughts as early as possible. This will also help build a relationship prior to asking for money.

Nveen Verma CEO & Founder at Creativforce

May 7th, 2015

I appreciate the feedback. With an accounting background, I was able to put together a financial model and projections. We are working on a social networking app that focuses on the nightlife cultural. Please check our website to have a better understanding (www.cinchgrid.com).

We just launched our beta through itunes connect/ testflight. Currently we are signing up users usings through social media such as twitter and fb however the app is not live yet. We have about 20 users on board but thats because we had to go back and fix some issues which occurred during our last beta testing. We fixed those issues have started testing again and are looking for more beta testers.

I agree we need traction but more importantly we will using the funds to grow our team and to implement our marketing plan. We would like to setup a team in the US that will work with our team in India simultaneously and if possible to move our key programmer to the US to increase turnaround time.

We have a freemium model where users do not pay to download the app. We features that helps user connect with people when they go out. Our financial model depends more on e-commerce/advertisement through nightclubs, bars, restaurants etc. So, in reality we need to do two things simultaneously, increase our user base and improve our frontend/backend to where users can benefit from.

I am from Punjab but I actually live in Las Vegas, Nevada but I know our app can be used in India in cities like New Delhi and Chandigarh because I have seen the nightlife there.

Michael Mills Personal Trainer, Wellness Director, and Owner of EDGE Holistic Fitness

May 7th, 2015

Thank you, John and Manav for your excellent contributions. Your feedback will be very useful once I get my wireframe/prototype ready for testing.

John Seiffer Business Advisor to growing companies

May 7th, 2015

Nveen,

I appreciate your background and ability to do a financial model and projections. But without numbers from actual customers investors tend to look at those things as fictional exercises.

An advertising model depends entirely on how fast users take up your app, and how long they keep using it. Since cultural and nightlife social apps are not hard to build from a technical perspective, and there are probably many already out there, most investors will not consider funding till they see some user numbers.

Sorry to be the bearer of bad news, but that's my experience as past president of an angel investor group.

Nveen Verma CEO & Founder at Creativforce

May 7th, 2015

John,

I appreciate your feedback. Although, it might sound as bad news, I find it insightful in improving ourselves and our objectives. Our number one goal is to launch the app and obtain users as quickly as possible. What would be a good number of users to convince investors that we have traction?

Alan Matthews Entrepreneur

May 7th, 2015

Think of fundraising as performance art. You have a show to put on. The more compelling the show, the better the valuation.

Your audience will tell you most brutally how well your performance is playing. The nice thing about small (investor) audiences is that they'll also suggest ways to improve your performance.

When you go out to buy a house you look at all available product to understand the market, and evaluate the overall landscape before you buy. Even if the first thing you see is the best bargain in the market you'll probably pass because you're not educated.

So it is with fundraising. Get comfortable with your performance and know your art well and you'll know when the right partner has arrived.

Roz Biles Business Development - Strategic Planning

May 7th, 2015

Do you have revenue or is it Pre Revenue?
I use a process driven approach to create the collateral for a presentation to investors. Getting ready for investors means being able to tell the story visually, in words and in numbers.
(PPT - Investment Brief - Dynamic Financial Model)
Pragmatic, rational sales driven approach for creating a valuation and financial model that can be used by investors for gauging progress.

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