When Is The Right Time to Raise Institutional Capital For Your Business? Here’s What You Need to Know.

As the founder of Viirtue, my entrepreneurial journey was a rollercoaster of decisions, risks and strategic turns. But one of the most critical turning points was knowing when to seek institutional capital for my business. This is a decision that can make or break a startup, and understanding the correct timing was paramount for us.

My company was bootstrapped for many years, and we maintained profitability throughout. This was a significant advantage, especially when the economy took a downturn in 2022. It was a moment when investors started valuing profitability more than unicorn potential, which put us in a favorable position.

But even then, the decision to raise institutional capital wasn’t taken lightly. It came after we saw rising traction and rapid growth. Larger groups had access to more capital and strategic advisory than we did, which fueled our motivation to seek institutional funding.

We ran a long process, vetting investors just as much as they vetted us. In our eyes, this was not just about finding a partner for financial growth, but also about securing strategic guidance. We were not looking for a mere check; we were in search of a partner who could offer advice and mentorship based on experience and industry insight.

The process wasn’t without its pitfalls. One of the primary lessons we learned was about the importance of hiring investment bankers that specialize in your industry. Initially, we made the mistake of hiring inexperienced bankers. This decision cost us time, money and a long tail period when we decided to move on from them. If there’s one thing I wish we did right from the start, it would be interviewing many bankers who specialized in our vertical and meticulously checking references.

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Investment bankers are not just intermediaries who connect you with potential investors. They represent you at the negotiation table. Many founders can receive Letters of Intent (LOIs), but the real challenge lies in navigating deals that don’t retrade and negotiating with future stakeholders, especially when emotions run high. These are the moments when a seasoned investment banker can make all the difference.

Ultimately, we decided to raise capital for a multitude of reasons. The business was growing exponentially, and we needed the development and sales funding to help us scale from a $20 to $30 million company to a company worth over $100 million. We had long-time minority investors who were looking to exit and needed liquidity. And most importantly, we were in search of strategic partners who could fuel our growth thoughtfully as well as financially. Raising capital was the silver bullet that enabled us to accomplish all of these goals in one fell swoop.

Are you ready to take on institutional capital?

Firstly, are you ready to commit to the robust reporting requirements of investors? Institutional investors will need regular and detailed reports on business performance, financials and strategic updates. This requires a significant time commitment and a level of transparency that some business owners may find uncomfortable. We had always operated Viirtue with candor and transparency. This made the transition so much more frictionless.

Secondly, do you truly need the capital to reach a milestone, or are you just taking money? Money for the sake of money can lead to wasteful spending and a lack of focus. It’s crucial to have a clear understanding of what you need the capital for, such as reaching a particular business milestone or achieving a specific growth target.

Thirdly, do you have a thoughtful growth plan of how you will deploy the capital? It’s not enough just to have money; you need a strategic plan for how that money will be used to grow your business. This includes identifying key areas for investment, understanding how these investments will drive growth and having a clear timeline for when you expect to see returns. Detailed financial modeling is an incredible asset for any founder. We never had a full-time finance leader, yet still were able to create detailed models with our CPAs and bankers. Additionally, when it comes time to pitch to investors, they will want to see these models coupled with market research and other evidence to support your assumptions.

Finally, have you set the stage to significantly scale your team? Fundraising is a pivotal step, but it’s just a piece of the puzzle. The real task is putting the capital to good use, which often implies expanding your team. This demands not only a well-crafted recruitment strategy but also the capacity to house a growing workforce.

At Viirtue, we have always held our people in the highest regard. Our human capital, which comprises industry experts and genuinely wonderful individuals, has been our greatest asset, our superpower. The team’s dedication and expertise have been instrumental in shaping my company’s identity and will continue to give us a competitive edge as we move forward.

The unique culture we have cultivated at my company has been a magnet for new talent, making our scaling efforts more seamless than we could have ever anticipated. But, let me assure you, a strong culture doesn’t materialize overnight. It’s a product of time, open dialogues with your team, investing in their growth and success, and co-creating a vision that resonates with their sense of purpose.

I have often emphasized the transformative power of finding purpose in work. When you can align a group of uniquely talented individuals towards a shared mission and imbue their roles with purpose, the result is nothing short of magical. A purpose-driven team is not just a group of employees; it’s a community of dedicated contributors who are invested in the company’s journey and its ultimate success.

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The quest for institutional capital is more than just a funding round. It’s a strategic move that can catapult a business to new heights if done correctly. But it’s crucial to remember that timing is everything. Raising capital should be considered when the business shows promising growth and needs an additional boost to reach its full potential. It should also be considered when partners are looking for an exit, and the company requires strategic guidance to navigate future growth.

One more point to consider is the importance of maintaining profitability. It’s not just about creating an appealing proposition for investors. It’s about ensuring that your business can weather economic downturns and still come out on top.

I hope you find success and the answers you are searching for in your entrepreneurial journey. Whether or not it is the right time to raise capital is ultimately up to you as a founder.