Raising a round isn’t a strategy. It’s a tactic, just one lilypad of many that leads across the capitalization pond for a growing company. How do the lilypads connect? What’s the best time for each new leap? Should you zig or should you zag? Now...that’s a strategy.
Seems like common sense, but building out a dynamic capitalization plan—the nuts and bolts of how a company will pay for what it needs—is challenging work, especially in early stage companies where bandwidth is already in short supply.
It’s important to put fundraising—all consuming as it may be—into a broader context. Trust me: very few companies can or should get all the capital they need from equity fundraising alone. Capital needs change over time. As do the options a company has to choose from. My advice? Think hard and think often about your company's capitalization plan, and definitely plan to make it dynamic.
Dynamic capitalization means understanding the inputs and outputs of your business, despite the many “what-ifs” that come with being a company in motion. If you are like most companies on earth, you’ll need more than successive rounds of equity funding to bring your company dreams to life. Equity, revenue, personal savings, grants and awards, bank loans, alternative debt, revolving credit, inventory financing, manufacturing partnerships, strategic partnerships, and/or revenue-based financing. For the vast majority of companies, it’s a combination of sources that fuels growth. (Gut check: remember that only 7% of the companies on the INC5000 have taken venture dollars).
What options might work for you? If you stop after the first kind on capital on that list, you are in for a rude awakening. There are options. Plural. That’s important. Take a look at most established companies and track their capitalization history. You’ll see many lily pads leading across the pond, different shapes and sizes, some planned, some not. Bottom line: capitalization plans rarely follow a similar OR linear path.
Mastering the financial tides of your business is a matter of company strategy. We see it when we screen companies for RevUp and we ask a lot questions about the company’s capitalization plan. We don’t expect the founding team to have all the answers, but their point of view on how company economics play out over time, and what resources they’ll need to cross the pond, is critical.
No two capitalization plans look exactly the same. But here’s a few thoughts on what goes into a solid capitalization plan for a early stage growth company:
Granular understanding of the company’s unit economics
Realistic view of how company math will change over time
Assessment of capital and capacity gaps that will drag on growth or create bottlenecks
Assessment of points where “good growth” outstrips cash-on-hand
Informed perspective on options for funding growth
Metrics that will signal fiscal challenges before they become a full blown crisis
The ability to make smart jumps between lily pads in the capitalization pond often separates winners from losers. Or, to double down on the metaphor, swimmers from the drowners. Smart jumpers don’t wait until they are mid-air to plan the route. It’s better to ask questions before you are desperate for answers, and when it comes to money, ALWAYS better to investigate options before you have none.
More About RevUp
RevUp invests cash and capacity into B2B and B2C companies that are generating revenue, have a killer team, and plenty of room to run in the market. In addition to cash investment, RevUp companies receive dedicated access to our in-house growth team and active support from RevUp management, an experienced team that has overseen investments in 120+ companies since 2009. Learn more at revupfund.com