Entrepreneurs tend to agonize over timing for a capital raise, but there is never an optimal time to raise capital.
There will always be theoretical value left on the table. You need to decide if raising capital now will yield more value for you in the long-run than not raising capital now.
There are two scenarios where a business owner has an immediate need to raise capital and the answer to “is now the right time” is almost always “yes”:
- You need capital to fund your business. This applies to both companies with negative cash burn and businesses with a working capital crunch. A capital raise process can take 4-6 months. If you’re going to run out of cash in that period, you needed to be out in market yesterday.
- Your circumstances require you to access liquidity from your business. Whether you want to retire or need cash for personal reasons, you have a higher need to raise capital now.
For other entrepreneurs, it’s less about “need” and more about “want.” They want capital to help achieve their goals. To answer “is now the right time” you need to decide whether the benefits of raising capital now outweigh lost future profits.
Here are two ways of thinking about this:
- For entrepreneurs seeking growth capital, you must determine whether the capital you raise today will help you make more money in the long run.
- For owners seeking liquidity, you have to evaluate whether reducing risk and diversifying assets today, makes up for lost profits in the future.
In either of these situations, you need to understand the ownership dilution you’ll be taking by raising capital and the corresponding opportunity cost/benefit of raising capital today.
What is ownership dilution?
Ownership dilution is the ownership percentage you give up in exchange for raising equity capital. Dilution is a function of valuation and the amount of capital you raise. The higher the valuation, the less dilution you take. The less capital you raise, the less dilution you take.
What is cash dilution?
Cash dilution happens when you raise debt. The cash required to pay back debt could have been used towards business growth or owner compensation. Further, debt is senior to equity holders, which means in the event of a sale, debt gets paid back first. If the cash from debt wasn’t deployed smartly, then an entrepreneur could lose out substantially.
If you can’t see a path to creating more value for yourself by raising capital, then you shouldn’t raise capital.