Picking The Right Time To Target The Right Investors

There’s a time and tide for everything, just as there are seasons. If you understand cycles, you’ll get what I’m saying here. Very often, I find professional fund managers and founders make this same mistake when raising capital - they target investors at the wrong time. They don’t weigh in the seasonality of raising capital.

So what is the right time to reach out to investors? The answer is not “always”. If you want to make real progress, think of investors just like yourself, well, ok, maybe not like your aggressive self, but as normal human beings.

This is so important because even in my previous firm, it took us a long while to realize the importance of reaching out to the investors at the right time. And what are those times?

There are basically two-time frames you have for raising capital - February to May, and September to November. If you’re from the US, that’s around Spring and Fall. Between these two seasons, investors are usually vacationing with their family or friends.

Getting an investor to make a decision during this time is going to be really difficult if not, it will be very slow.

Why did I exclude January, well, everyone is back from the new year celebration, they may be in a good and optimistic mood, but they’re now either closing their books for the previous year and concluding their audit, as well as preparing themselves for the year ahead. They’ll be back in action by February, which is probably the busiest period with a flurry of activity.

Why did I exclude June? Well, by then everyone is planning for their vacation! Just (partly) kidding. Larger deals take time to close, even smaller ones would require a due diligence period of 4-5 weeks. So if investors can’t expect to close and follow up before then, they might as well try push things till after the vacation. Hey, they’re looking forward to it after all that ‘hard work’ of investing!

If you’re in the Middle East, you also need to keep in mind two things, one is the summer - it can get very hot here, reaching 40+ degrees. Anyone and everyone would love to escape the heat. And if you’re a Muslim, you also have the holy month of Ramadan, which is the fasting period and pretty much everything things slow down. It’s not easy to make a decision on an empty stomach - go ahead, try it once. The timing of Ramadan changes like Lent over time, so keep that in mind when approaching the region.

Why did I exclude December? That’s because pretty much every investor I know respects that the whole world slows down during this time for Christmas and New Year. If you’re in the US or targeting US investors, the period starts from the end of November, i.e after Thanksgiving - so basically from 23 November all the way to 6 January is the holiday season.

So if you’re planning to pitch investors, get your act together before these two windows of opportunities and you’ll have a better chance of raising capital.

Now, of these two periods, which is the best to target investors? To find out, sign up for the PitchProcess and we’ll spill the beans on increasing the odds of your success by as much as 50%!

So What's The Best Time To Raise Venture Capital?

That’s a tough question! Each startup is unique, and so is the venture capital funding process. Many factors determine the best time to raise venture capital for a startup business: what lifecycle stage the business is in, the sector it operates in, the venture capitalist you’re targeting, the time of the year, etc. In this article, we’ll address some of these factors.

Every business, no matter whatever stage it’s at, needs funds. Raising them is a tough job. It takes a lot of time, it diverts your attention from the business, and it can take a toll on your emotional quotient. And the results are unpredictable. Knowing this makes a world of difference.

In the early stages of your business, it’s better to bootstrap as much as you can and raise a small round of capital from family and friends. Once you build your business, have a solid customer base and have generated some revenue – in short, once you have a track record to build on – you can raise funds at a much higher valuation. When you have a proven business model, the risk/reward ratio turns significantly in your favor.

Pitching becomes much easier at this stage. It also helps you focus more on building your business rather than getting into round-the-clock fundraising. This approach adds value to both the entrepreneur and the VC.

However, it may not always be possible to grow organically. That’s when you may need money for international expansions, to hire experienced professionals, or for marketing and various other purposes. It’s worth noting that recently, less than 5% of VC funding went to early-stage startups. The balance went to enterprises in a post-startup phase.

It’s possible to get reasonable valuations only when you’ve had a good quarter. Investors always like to see plump order books and a growing customer base. Let’s assume you’ve had several sequentially profitable quarters, but missed the last one. This is the time of year you need funds and approach a VC. The investor may pick on this one bad quarter, and you’re likely to end up with a lower valuation.

Another point to remember: never go to a VC at the eleventh hour, when you have little cash left. A prudent entrepreneur assumes that fundraising will take longer than expected, have a working capital cushion for at least a year, and then go about the process of fundraising. To summarize, it’s not a wise decision to approach an investor immediately after a bad quarter if you want to raise funds on favorable terms.

Investors also like a sneak peek into your business. You may have received a term sheet, but anything can happen in the “in-between” period. The VC would definitely like to look at the next quarter’s results as well. You’re the one who wouldn’t like the money to sit in the bank, so always time your closure at a date at least a month before the end of the quarter.

The type of business also determines the perfect time to raise money. If the business is not capital-intensive, it’s better to bootstrap, as mentioned earlier. But some capital-intensive infrastructure and technology-dependent projects require funding in the initial stages. In such cases, if you’re fully convinced that your idea is sound, then you may approach the VCs in the early days.

Another important rule of thumb is to start raising capital long before you actually need it. The first step to achieving this is to start relationship-building well before you’re ready for VC funding – or, as they say...

Dig your well way before you become thirsty.

Investing time in building relationships, networking, and attending venture-capital conferences is likely to pay rich dividends in the future. VCs are not keen on cold calls (so they say); they prefer to invest in people they’re familiar with. References from fellow entrepreneurs, industry experts, and other investors are the most effective means. On that note, here’s another truism: “your network is your net worth.”

The best way to connect with a VC partner is to get someone on your contact list to spread the word that you have a remarkable idea and are looking at various ways to raise funds. If the VC is even slightly interested he will arrange a meeting, because you’re only thinking of funding and he won’t have to commit to anything.

This way, the VC is sure to track your progress. Over time, you’ll have an opportunity to build a stronger relationship. The sooner you start talking up your startup, the easier it will be to find suitors when you actually need money.

Timing your exact moment of need is nearly impossible. Your business idea is a baby you have nurtured from the start, and sometimes you have a gut feeling that this is the moment. And intuition works! Identifying your burn rate (the rate at which you're spending cash) also enables you to zero in on the right fundraising moment.

There is a myth that most VCs allocate all their funds by the fourth quarter and that Q4 is not the best time to raise funds. In reality, big funds don’t limit themselves to any quarter of the year. What matters most is the idea and the stage the startup is at. Great ideas always generate interest and have a swarm of investors chasing them, no matter the time of year.

You should raise only the right amount that is required. VCs are looking at return on investment (ROI) - the more money you take, the more the value you are expected to create. When you raise more than what is required, you are at the risk of being thrown out of your own company as you lose much of the control.

There is also the temptation to splurge on activities like renting out an office, marketing and hiring more people. At the same time, you should also be careful to raise enough so that it lasts till the next round of funding. As already mentioned, being cash-starved would increase your vulnerability to agree to unfavorable terms.

As Jeffrey Archer would say... “Not a penny more, not a penny less.”

You’d be better off to check the number of deals done by your prospective VC partner in that particular year, and pitch accordingly. It also helps to look at the quarterly fluctuations in the industry. If your industry is expected to do well traditionally in, say, Q1, and your firm hasn’t performed well, then it’s better to avoid raising funds in that particular quarter.

Having said all of the above, there are exceptions to every rule. Ultimately, you’re the best judge of your idea. Whatever stage you’re in, raise only what you need to keep you in business, and never close your doors for want of funds. If you're preparing to raise capital for your business, I highly recommend checking out The PitchProcess Framework. It's been developed over the years, by an entrepreneur & professional investor.