How to know you’re ready to raise capital with VCs

Every startup wonders when they should start raising capital. Maybe it’s because they’ve been growing a lot, or because they haven’t been growing enough, or because the founder has started getting calls from venture capitalists.

There is, it seems, a sweet spot for a company when it comes to looking for venture capital.

Knak is in that sweet spot right now. Here are a few of the things I’ve learned, from my discussions with VCs and from my own research, about how to know if and when your company is ready to open itself up to outside investment.

1. You can demonstrate product-market fit

When Knak first went into business, we experienced normal growing pains as we built and then rebuilt our product, customizing for every new client. As we evolved, what we sold evolved into a stickier, higher-touch product that marketers could use every day and that satisfied more customers’ needs right out of the box. The result is a great product and an efficient, repeatable process.

Our product is now very good at solving some of our customers’ big headaches and providing them with a lot of added value.

And we can show it in two ways. First, our customers consistently tell us that our product works. Second, the velocity of leads coming in is picking up.

2. You know exactly where you’re going to spend the money

An investor will quite rightly want to know how you intend to spend their money. We’re now at the point where we can answer that question in detail.

We recently completed a growth plan for 2022, and we identified 48 new hires we want to make over the course of the year. We clearly identified where we’ll put each of these new hires, what they’ll be doing, and how each will benefit the company.

We also now have enough experience (and data) to know roughly how much growth those new hires will generate. Until we had a few years’ experience under our belts, it was a total guesstimate trying to figure out how much of a return each new employee would bring in. We’re much more confident of our projections now because we have data based on past experience.

We could probably hire these people slowly, over the course of the year, as we grow. An infusion of investor cash, though, would allow us to hire them all at once. That, in turn, would allow us to take immediate advantage of opportunities we see, further fuelling our growth.

3. You see a big opportunity, and you have numbers to back that up

When we started Knak, I was pretty sure there was a big opportunity for a company like ours. But we didn’t have much in the way of numbers to back up my intuition.

Now, we do.

We have data that shows how much revenue we’re making from different segments of the market. And from that, we’re able to project the size of the total addressable market.

Because I can now see how big the total addressable market is, I can confidently demonstrate that there’s a large opportunity for us, even if we only manage to snag a small share of that market. (Just to give you an idea: the martech sector was worth an estimated $65.9 billion U.S. in North America and the U.K. alone in 2019.)

Having reliable data on which to base our projections suddenly made everything real for me. The growth opportunities for Knak are not abstract anymore.

4. You have confidence in what your business can do

My confidence in Knak’s ability to perform well comes from three sources: data, customer feedback, and my own knowledge of how our team works.

First, the data. Seeing the year-over-year growth we’ve been able to achieve, and seeing how that growth is continuing, is a great source of confidence. What’s more, I can show those figures to potential investors. I can show them how our growth has in some cases exceeded our forecasts.

Confidence also comes from the number and calibre of customers we’ve signed up. Our customers include some of the best-known companies in the world. They’re telling us we’re solving some of their biggest headaches. And their feedback is helping us improve.

I also have confidence in our team, and their ability to execute.

We’ve been working closely together for some time now, and I can see how smart they are and how passionate they are and how well they do their job. (I’m not the only one who sees this. Our customers tell us as well.)

That goes not only for the employees, but for our leadership team and for our advisors.

Having confidence – and being able to show what it’s based on – is a sure sign it’s time to bring in outside investors.

5. You feel financially mature enough to take things to the next level

I’ve talked several times about how having data is crucial. Some of that data is financial, and sound financial data can only come when you have a proper finance and accounting system in place.

Until relatively recently, we didn’t have anyone in finance. Now, not only do we have people handling finances properly, we’re on track to begin producing audited financial statements by the end of this fiscal year. I think audited statements are a sign of maturity, and are useful for giving investors confidence in your company.

Having a proper financial system in place also lets us create accurate and credible revenue models, showing what outputs to expect from what inputs.

Finally, a proper and functional financial system will help you handle and keep track of investor cash, ensuring it’s used properly and wisely. (It would be almost irresponsible to try to raise money if you didn’t have a system in place to keep track of how it was used.)

6. You want to hit a home run

Some companies (particularly Canadian ones) can be risk-averse.

Companies like this prefer to play it safe and, to use a baseball analogy, are content to hit a single or a double.

Other companies – and American companies are very aggressive in this regard – try for a home run. Instead of inducing them to act with caution, risk makes them double down and work harder.

I think that if you’re looking to attract venture capital, you’ve got to want a home run.

We could continue running Knak as we have up to now, and continue to grow – enough to reach a certain measure of success, but not enough to stand out. But I don’t want to look back in 10 years and regret that I didn’t at least try to go big. That means facing some risk. And looking at data from an optimistic, not conservative, perspective.

7. You want guidance as much as you want money

We’ve been fortunate to have a lot of great advisors, who have helped us make good decisions over time.

But as we look to our next phase of growth, we’ve come to realize that we lack internal expertise in a number of areas – partnerships, for example. We have very few partners, and we are not sure how to start growing that channel.

Partnering with the right venture capitalist will help us build that new channel faster and more efficiently than if we tried getting there on our own.

Partnering with the right VC will also open doors, because they’ll be able to introduce us to their own networks. And because they’ll be committed to our growth, they’ll want to make those connections work.

VCs will also help tell our story to the world. We have incredible customers doing fantastic things with our software, but I don’t think enough people know what.

We want help in getting the word out.

This is a good time for us to be looking at venture capital. SaaS companies are attracting a lot of attention right now. We have a chance to make our mark before another company tries to move into our part of the market. We’re in the sweet spot, not by chance but because we worked hard to get ourselves into a place where can present a good solid business case to investors. This will allow us to do a raise from a position of strength.