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MANAGEMENT: Identifying the proper moment to raise money for your new business idea
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Identifying the proper moment to raise money for your new business idea.

By Marwan Emile Faddoul (Managing Partner, Qadisha Consulting)

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Many of you have heard of the old saying: "Raise money before you need it". This saying is true, yet the question that many people ask for, is: when? When do we, as entrepreneurs, owners of companies and business people need money for our business?


In this article, I will raise different situations where money should or should not be raised. I will do so by sharing with you a conversation I had not so long time ago with Steve, a friend of mine who is running an IT company that develops mobile applications.


Steve opened his startup about two years ago in Beijing, he was doing well and planning to expand inside mainland China, moreover he got several calls from investors in Dubai and Saudi Arabia who were interested in his product. At the beginning of last October he came to me and said: Marwan, you know my situation, I am doing well, but is it the right time to raise money? I told Steve that raising money for a business is generally a good thing because it is more fuel for your company, yet it has its positive and negative outcome. He looked at me and asked me to proceed. I did so, and presented several events to elaborate my point.


Bootstrapping and the creation of a solid platform


BT 201701 MANAGEMENT 03As a first scenario, where raising money is not a good idea, I asked Steve to go back in time, to the period where he was establishing his company. Steve, I said: when you started, you didn't have a proper idea of what the market really need. You were exploring the demand of your customers and identifying what works and what doesn't work. At that time raising fund was out of the question. On one side, investors would never invest on an idea that is not solid, and on the other side, if you had raised money, that money would have been most probably lost. If not lost you would have given a reasonable part of your company as a gift. The best thing to do at that time, was bootstrapping and investing as little as possible from your own money till you find the proper path of your business idea.


Raising money when you have strategic investors


There's more capital in the market for seed investment and small companies than there has been in some time. When it is easy to raise money, you will have more temptation to do so, and your company's valuations will go up.


You might say: I am going to take money from these people because they are offering me 10 million RMB pre. Well Steve, doing so may be a huge mistake. First of all you will be diluting yourself, second of all, you may not be getting the best investor. The best investor is the one who will add more value and who will help your company grow or exit or whatever.


BT 201701 MANAGEMENT 02If, for example, we are talking about your potential investors in UAE and in KSA, the one in Dubai is not only willing to give you money but is also capable and willing to help you enter and expand all over the Middle East. However, the investor in Saudi Arabia, is a wealthy person who only wants to invest his capital. I do understand that the second person is willing to pay more for the same number of shares, but on the long run the investor from Dubai will surely help you strategically increase your revenue.


Steve, I proceeded, there is real value in who your investors are. My advice is to raise more money from the most value-added investors if you can. Be cognizant of the right pricing for your company at the right time in terms of the valuation. Valuation is a hard thing to keep up with and live up to, and it makes the next rounds very hard.


Take Uber as an example. In its angel round, the pre-money was around sub-five million dollars for 1.5 million dollar round. Today Uber would probably be able to command 10 to 15 million dollars based on who is involved before they even have a product. Travis and Garret the founders of Uber decided to get a good, diverse group of angel investors who helped them launch in different markets. It was a strategic decision, which helped their company become geographically diverse. The two founders sold a big chunk of their company early on. As Uber grew, the company was able to raise billions of dollars at 18 to 40 billion dollar valuation.


You should know, the first round of funding is not the only round that matters. In fact, it hopefully matters the least. You want to motivate your investors to help as much as possible by owning a real chunk of the company. Construct a capital foundation without caving into the opportunity to raise at much higher prices than you are actually worth today.


Fundraising when the market is speaking


As a third situation, where it is good to raise money, is when the market is speaking, and where you see there will be a change in the economy. For example, in your industry, about 8 to 10 years ago, people use to rely a lot on phone messages and direct calls when they wanted to communicate with each other's. But when the app industry took place, people started to rely more on mobile applications. The companies that benefited the most at that time where the app developer companies, which saw the trend of using mobile app coming and decided to raise money beforehand.

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Also, depending on the market future demand, it would be reasonable to raise money if you are developing your product and need to secure the number of users to gain your position in the market. In this situation you will be investing for the future knowing that there will be no return on investment before reaching a specific number of repetitive users on your site. Once this number is achieved you will be able to generate revenue mostly from users and advertising.


Not to forget your competitors and your competitive advantage in the market. Here, it is good to raise money if you found a way to beat your competitors. Here, money will be used as a joker, to either bypass your competitors or simply put them out of your way.


In conclusion, take advantage of the market when it is going down, sometimes a "down" market is the best opportunity to seek funding. Use the downturn as an opportunity to add great talent, beat the competition and gain ground in the industry. Financing at the right time can help you with all of that. Your company can accelerate while others lick their wounds.


Before ending our conversation, I told Steve: Steve you are doing well and growing, many investors may reach out to you to set up a meeting. Meet with them, even if you are not seeking funding quite yet. Doing so allows you to start conversations with the ball in your court and gives you time to learn about the different kinds of investors that are out there. These meetings helps you know more about their strengths and weaknesses, what they can bring to the table by partnering with your company, whether or not they share a similar mindset, how they can help accelerate your growth and other attributes, beyond just money.


When the time comes to seek funding, you will have more knowledge about what's available so that you can make better decisions as you move forward.


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