What’s the most critical element of startup success?

Bill Gross, founder and CEO of the technology incubator Idealab, answered that question in 2015. To gain a better understanding of why some startups succeed and some fail, he studied startups incubated at Idealab that succeeded as well as ones that did not.

His answer: timing.

Gross’s conclusion was about the timing of an idea and its execution — not the timing of a funding deal. And yet, isn’t funding often what stands between a founder and their ability to execute on a great idea?

How do you know when it’s time to hang up your boots and seek some outside capital?

The reason for most funding raises falls into one of four categories. If one of those matches where you are, it might be time.

You need growth capital

It’s the most common reason for seeking capital — you can’t grow as fast without it.

You found a formula for scaling. For every dollar you spend, you make $3. You demonstrated the model with a thousand customers. You spent a thousand dollars and made $3,000.

Now you want to pour fuel on a fire, or to take over or expand into a different market. Now you want to spend a million dollars.

It would take you a really long time bootstrapping to save up a million dollars. So you need growth capital.

In this scenario, it’s a win-win for you and the equity firm who invests.

You’ve validated the model and taken all the risks. They’ll provide the capital you need and watch you grow. That’s why a lot of private equity firms call themselves growth partners.

Though the driver for a deal like this is the capital itself, an equity firm might also provide expertise or connections to other resources you need — perhaps a good CFO or head of sales.

And having done this, you’ve probably maximized the valuation of your company and gotten the best deal terms possible.

See: How to Build a Multimillion Dollar Business

You need strategic partners

Sometimes the capital isn’t the primary need. Sometimes it’s the expertise, the connections, or the partnerships.

I joined Knite in 2002 as their third CEO. They were commercializing a new invention for a spark plug founded by a plasma physicist from Princeton.

The proof of concept worked. We’d built some prototypes and tested them with some engine manufacturers, including some auto manufacturers in Detroit and Germany.

The challenge was that the industry had very high expectations for spark plugs: they should be very inexpensive and last a hundred thousand miles.

Our spark plug was much more powerful, but it didn’t last as long and it was more expensive. If we wanted to keep the company going, we had to go further down the commercialization route. And we weren’t able to do that on our own.

We needed to be able to work on the spark plug within the development of an engine, not just as an add-on. We needed to research new metals for the spark plug electrodes and new ceramics for the spark plug body — things that could withstand the higher voltage and heat. New materials would allow the plugs to last longer.

So we needed to work with metallurgists and ceramicists. We needed access to that expertise, and we needed to buy time.

Though our focus was a strategic partner, we also needed that partner to bring capital to the table because none of it was going to happen quickly.

Sometimes in situations like that, if you’re willing to co-own or co-produce or give exclusivity to a partner, they’re willing to pay. We wanted to find someone who saw that the partnership would also help them create a more powerful engine and reduce emissions, which was one of our core value propositions.

We approached a bunch of engine and related technology manufacturers for partnerships. None of those partnerships ended up working out for us, but each would have brought different resources that were needed to help us.

See: Build for Scale or Build for Growth

You’re out of runway

This isn’t the spot anyone hopes to be when they get started. Yet many founders end up here, and outside capital can be a way to gain more runway.

You haven’t demonstrated all the elements of your model, and you need more time. You’ve blown through your savings, and maybe some friends’ and family’s money. You haven’t been able to generate enough revenue (or profit) as quickly as you thought, but you still have a lot of optimism about where this business could go.

So you have to sell that optimism to a seed stage investor or a venture capital firm, and ask them to take a bit of the risk with you. Hopefully they’ll see you have what it takes and provide the capital you need.

An early stage investor, especially an institutional one, may also provide guidance on what your next steps should be. Maybe they recommend that you use some of the funding to hire certain talent, or build better lead generation. They won’t provide the level of resources that ultimately a private equity firm would, but they still want to do whatever they can to ensure your success.

They’re looking forward to a substantial return on their investment when you eventually exit with a sale, a private equity deal, or even an IPO.

See: How Does the Acquisition Process Work?

Something big is happening in the market

In his research, Bill Gross identified five factors as critical to startup success: funding, business model, idea “truth” outlier, team/execution, and timing. Timing was the biggest deciding factor more often than anything else. “Sometimes timing trumps everything,” he said.

Many investors passed on AirBnB, saying that no one would want to rent out their own home to strangers. And then the 2008 recession hit.

When the time is right, you need that outside capital if you don’t have enough to capitalize on the moment. A window is about to close or open — maybe the economy, maybe a change to a competitive marketplace. You’re not ready to do it now, so you need to bring in a partner.

Look at how many businesses capitalized on the pandemic — a serious disruption to our business environment.

There’s an opportunity that exists today that didn’t exist yesterday, and if you’re not financially ready for it, you need to get ready fast.

Should you raise capital?

The $20 million question: when’s the right time?

There isn’t a one-size-fits-all answer.

If you don’t meet one of the categories above, it’s probably not the right time. If you do, well… that’s a more challenging analysis.

We’ve seen entrepreneurs wait too long because they didn’t want to have a Board or a partner. It was one more thing for them to manage. Of course, as a CEO, it’s a skill you need to develop.

The downside to waiting too long is that you may be more desperate. You may be out of runway, and that impacts your valuation. You have less leverage when you’re negotiating from a weaker position.

You want to time your capital raise to maximize your valuation. A lot of people say to raise the money when you don’t need the money.

It’s important, though, to acknowledge that raising capital isn’t a silver bullet to success.

When you raise capital, you’re accountable to your investors. You report to someone else — a board of directors or an investor — whether or not they have control of the company. They’re expecting to get a bigger check back than the one they wrote you.

That means you’re making different decisions than you made before you got funded.

When you’re bootstrapping your business, you control the roadmap. When you take outside capital, you let go of some (and maybe a lot) of that control.

Sometimes a founder decides not to bring in capital even when it looks like the right time. Maybe there are things they still need to discover. Maybe they’re in a good place, and they want to experiment a little with the next few steps. Maybe they don’t want to be accountable to someone who’s looking for an ROI.

The danger is that they miss the window and end up in a desperate situation where they need capital and have much less leverage to negotiate for it.

The flip side is that maybe they build a more profitable model because they learn how to do it for less. Or they allow themselves to spend time on a tangential unprofitable project that ends up becoming their best-selling idea.

Final thoughts

If you’re waffling back and forth, you can get stuck in the gray zone — paralyzed by the inability to make a decision.

I often find that the final decision is made based on a founder’s risk tolerance, how much fear and how much passion. Sometimes those decisions turn out to be the right ones, but leading with base-level emotion isn’t a winning strategy.

Instead, founders should call in an advisor, someone to give that outside-in, non-emotional perspective. That could be a coach, an advisor or a peer group that can view all the facts and give insights that aren’t colored by fear or passion.

We work with entrepreneurs that are crossing the chasm from founder to CEO, from bootstrapped to funded. Contact us to see how we can help your business.