I'm a small-time investor and have been working for and with startups for 13 years.
The time to take seed capital is:
- When you've proven demand for your product by making sales.
- When you have at least one repeatable, predictable, and profitable system in place for selling your product.
- When taking an equity investment would let you grow the company faster than the other means that might be at your disposal: bootstrapping, debt financing, organic growth, joint ventures, etc.
There's a trade-off. You want to get the idea validated up-front and get as far as possible as you can on your own, but not spend so much time doing this with meager resources that the opportunity passes you by.
You don't want to give away the whole company to your investor, but you also don't want to stunt your growth and give up huge potential profits just because you were holding out for slightly better terms.
The better your sales, and sales growth, the better the valuation you'll be able to negotiate.
A great idea and a proof-of-concept alone are worth basically nothing.
A company with sales is worth more.
A company with sales growth is worth even more.
A company with month-over-month sales growth, ongoing relationships with customers who repurchase, and steady-state profitability is worth *much, much* more.
(Steady-state profitability means that if the company's number of customers stays the same, the business operations turn a profit. Often, early-stage companies that have a recurring-revenue business model will spend more to acquire a new customer than they earn from the first sale; the cost of acquisition is amortized over the lifetime of the customer. This is because they want to grow their recurring-revenue base and increase future profits at the expense of short-term negative cash-flow.)
All that being said, if you think you will need venture capital funding in the future, you should start looking for it long before you're going to need it.
Have a "Plan B" in place, too. Don't get stuck with your back up against a wall, hoping and praying that your seed round will close before you start bouncing checks. If your investor knows you're going to go bankrupt without the investment, they have a lot of leverage for getting very favorable terms!
Answered 9 years ago