One question that is frequently raised by entrepreneurs is whether it’s advisable to put off fundraising until the company has something to show investors, which means a higher valuation can be justified and the investor gets fewer shares for his money (Joy!).
Moreover, if you manage to wait with your financing round, continue to develop your product, get some KPIs (Key Performance Indicators) and maybe even grow your user base, you'll get another important advantage: Catching the attention of investors who only invest in companies at this stage. Adding to this mix the fact that investors go crazy over self-funded entrepreneurs makes it an open and shut case, right?
Actually, there are many instances where I would recommend to entrepreneurs not to wait and rather start their money raising efforts as early as possible. In general, this will be the case when there is a risk that the disadvantages of delaying the investment will outweigh the advantages of doing so, and might even lead to a total failure of the startup. This is true especially for online startups which usually require less money to launch and grow and in general have a much shorter life cycle than startups in other industries, like biotechnology or electronics.
First, entrepreneurs need to understand that even if an enterprise succeeds without an outside investment - by bootstrapping, swapping services for options instead of cash payments, working with accelerators or similar entities or using any other shortcuts - progress will be slow compared to what the company could achieve if it had a significant investment from an outside investor. The problem is that for many businesses, speed to market is critical. One of the main concerns is of course competitors. It is simply not advisable to just sit and wait for them, especially if your startup has no technological barrier to block them.
However, competition is not the only reason to move quickly. For entrepreneurs, time is an enemy. Your market might change, new regulations can alter the rules of your game at any moment. A new technology will make your product irrelevant. The best way to fight these risk factors is to take as many shortcuts as possible including by raising money when possible and using it to make rapid progress. Raising money at an early stage will literally buy you more time. Additional developers will allow you to launch faster and with a better product. Using better software tools can also help you to produce a better product and to avoid unnecessary delays.
Another important issue to consider is that bootstrapping is usually a tough period for entrepreneurs and a considerable strain on their "biological clock". All founders start fully committed to the startup. Then difficulties appear, whether they are internal to the startup (e.g. a technological problem) or external (e.g. not getting any salary…). Motivation quickly decreases, disputes are getting more common and at the end someone quits and go to work for Google. The obvious conclusion is that you should do whatever you can to shorten your startup life cycle, including by taking the investors' money even if you think you can succeed without it, just a little slower…
When considering the question of whether to raise funds or not, it is important to look at the full picture. Don’t just settle for the idea of maximizing the value of the company, however important that might be. The idea of two founders working in a garage is always a romantic one but every project has an ideal moment (a “sweet spot”) when it should pick up the pace by raising real money. Make sure you know what your is.