Raising money is not only a challenging task but also very important for startups. Let me summarize some key learnings that I made with my first startup over the past 2 years.

When should you raise money?

If there is only one learning that you take away from this, let it be the following: Finance through cash flow whenever possible and don’t give your company away!

You are in the strongest position when you have a cash flow generating business that’s working cash flow positive and is not in need of outside financing. Additional money can help you grow faster and scale things up, but it should never be essential to get you off the ground or to run your business in the first place.

So, raise money when you don’t need it but with the clear goal to scale it and get to the next level. Don’t raise money when you just have an idea but no validation or proof that it’s working.

Who should raise money?

This is an easy one — there is only one single person credible enough to raise money: It’s the CEOs job! No one else than the CEO should pitch your business and the long-term vision to investors. As a first-time founder you need a lot of market validation to proof that your concept works. If you are a successful serial entrepreneur this part becomes easier since you already established some sort of credibility.

How much should you raise?

As a rule of thumb, you should raise enough money for surviving 18months. I suggest you make three different calculations: Optimistic case if your plans work (to show the potential). A worst-case plan showing what happens if there is no additional sale/user growth and you must survive on the existing business. And third a realistic plan where you will end up somewhere in between these two.

Also sign up for free giveaways or free trials that you get as a startup like amazon web services and much more. You mainly need your money to pay salaries (although you will never be able to pay yourself properly during your startup stage) so save it as much as possible on stuff that you can get for free or replace with a free product.

Timeline & duration

Raising seed money takes about 4 to 6 months. Raising money is usually quicker in the US and quicker with a convertible note than with funding for an exchange in equity. Be prepared with your 6 months timeline to raise money and get started when you don’t need it! Please also account for holidays with investors — from mid-July until end August and from December to mid-January there is nothing happening — consider that for your planning.

Content/topics to cover

Depending what kind of money you raise, there is a different focus. Seed funding is betting on the team — there is usually not too much traction, so the investors must believe in the strong team behind the business. Series A is funding you for additional growth with first strong metrics and traction but is at the same time still a big bet on the team. For Series B and beyond you must have a clear proof of concept and very strong growth metrics. The understanding of an investor at that stage is to throw money into your business to generate more money out of it with your proven system — sort of a license to print money.

Additionally, important things to cover or prepare: Make sure that your employment contracts have a clear IP ruling (IP must belong to your company!), include your financial model and the cash flow projections, an executive summary to deliver the sweet points quickly and your shareholders agreement.

On a side note: Make sure that you do not choose bad lawyers — this is not only a very bad sign to potential investors and scares them off — but will be a pain in the ass for yourself later on.

How to choose investors

Choosing your investors is like marriage — just stronger. Once you get them onboard, there is no way that you get rid of them — a divorce is usually not possible — so make sure that you choose them very wisely!

What most entrepreneurs don’t to: Due diligence on their potential investors. Check or ask what they have invested in in the past, what their role and involvement was and check with the entrepreneurs of the companies they were invested in as a reference. This is so crucial but most of the time simply overlooked. Also check for ticket sizes, geography and industries of your investors to choose the right people to contact.

Once you start contacting them, make sure that you either get a warm introduction to them or have someone who knows them well to check whether they might be interested in getting to know more about your business. Cold emailing almost never works, so don’t waste time trying. Statistically it takes about 58 investors to contact to close a round, 40 first meetings and about 12.5 weeks from first contact to closing the round.

Another recommendation: Track everything you do related to fundraising and investors in a CRM! You need to own the process and know who you contacted and what their feedback was!

When meeting with investors, make sure that you establish an equal relationship as partners. Don’t get dependent on investors or put yourself below them just because you are the one who is asking for money. Also make sure that you ask them for their investment conditions and double check with them, either verbally during the meeting or as a follow up email afterwards to make sure that you are on the same page and can lead them from being interested to legally binding and participating in your funding round.

On a last note: Term sheets are completely useless and often not even worth the paper. Only a written confirmation about the terms and investment sum is legally binding and confirms their investment — not a term sheet.

Final words

Whatever might come, make sure that you have a back up plan. This is way easier if you start raising money when you don’t need it and already have a strong business up and running.

Also make sure that you keep the right incentives in mind — founder must have enough shares to be rightly incentivized — if this is not the case it can be a deal breaker for future investments from other parties.

In today’s startup boom, companies that raise a ton of cash are usually celebrated like crazy. In my opinion raising money is not a time to celebrate — it’s a facilitator to get you back running the business and growing it. Instead, celebrate real milestones like the acquisition of new clients or the release of new product features etc.

Good luck!