I have been developing a web-based eCommerce niche app for the past year and am getting close to launching. While I cannot disclose too many details, lets just call it a sort of Shopify, but taking it to a whole different level.
While I can support the project financially myself to a certain level, as it gets bigger I definitely will need funding at some point to support employees and expenses until it reaches profitability.
I fully realize I need to sacrifice a percentage of the company and possibly even voting rights.
The only question I really have is ...
This is the first time I will need angel/venture funding for a project, so I hope someone who has already gone through it can assist me.
Thank you very much :)
Before the launch, you have a dream to sell: "this is what it could become". If your dream isn't a fantasy, then you can actually raise money. After the launch, you're selling reality: "this is what it is". So based on that perspective, here are the four possible outcomes:
1) You launch your product without raising funds and your business model works: you built it and people come and come back. In this case, you'd be better off raising money after the launch because you'll have more negotiating power. This would be the best outcome for you and the company, but not necessarily the most likely, especially if you have very little business experience.
2) You launch your product without raising additional funds, your business doesn't work. The dream is gone and now you're selling reality: "I have a site that's not working, do you want to invest?" That's going to be a tough sell; you better have the funds to fix your site if you find yourself in that position.
3 ) You raise money before the launch and it works: great. Now you've got funds to scale a working business, even though you probably had to give a somewhat sizable portion of your equity and control. Not bad at all, many successful businesses took that route.
4) You raise money before the launch and your business model doesn't work. This is the nightmare scenario because even if you have the entrepreneurial vision of what it would take to fix the business, investors will probably take away your decision making power, and perhaps even oust you (Losing Controlling Interest in a company, can that be bad? )
So here are my recommendations based on your situation:
A) The most expensive money is the first money you raise. If you have the funds to launch your business then I recommend you also leverage these funds to secure debt and have enough cash in the bank to operate the business after the launch. Basically, you're going to have to give up a lot to raise funding before launch, not just in terms of equity but also control, not to mention that you could end up with terrible partners in the long run. So, when money is that expensive, borrow it. That way, if you land in case #2, you'll have some runway to get to case #1.
B) Find qualified and experienced advisors who can help you avoid some of the inevitable mistakes. As an entrepreneur, you'll quickly come to realize that everybody is going to want to give you advise: how do you tell the good ones apart? In my experience, good advisors listen first to everything you've thought of and then think of what can help you. Bad advisors cut you off early and come up with ideas and advise that you've already thought of anyway since you've been working on your business for far longer than the 10 minutes they've spent thinking about it, not to mention that a) some seemingly good ideas turn out to be not so great once you think two or three steps further and b) someone may have been very good at building a company in some unrelated space but might not be best suited for your particular business. So find advisors who listen first and who can help you in your particular space.
So to answer your question, it's best to raise money after the launch IF you end up with a working business model. Now of course, before launch, there's no way to know how things will work out, so if you decide to raise funds after the launch then you're also taking somewhat of a risk of ending up in case #2. I think that the best way to reach case #1, apart from having a good product for which there's demand, is to have cash on hand and good people around you so you can avoid case #2. Since you currently have some cash, I'd recommend leveraging it to secure additional funding through debt financing, and looking for good advisors.
Good luck with your business.
There are two types of startups, how and when to raise money differs greatly between the two so it's important you know what type is your company.