When do I know it's time to approach VCs (or do I need to)?

The answer depends on your goals for the company.

If your goal is to become as big as possible, as fast as possible, plus have a nice salary, even if that means a smaller chance for success, raising money is the way to go. It sounds like you have enough traction to get a good deal since you have a going concern and not just an idea.

However if your goal is to run a nice, profitable, sustainable business, and possibly get rich in the future, and it's OK to grow slower, then don't raise money.

Both Jason and Vineet make great points. There are really two ways to think about this.

1. If someone wanted to invest, do I take it?
2. Do I really need the money to become profitable?

One mistake most startups make is that they think they have to hockey stick to become successful. If you have VC funding, then yes, you have to do that. If you are self funded, then the only thing you really have to do is make a profit. The sooner the better. The less money you take in, the better. So, it's all about what Jason indirectly mentioned, scale. Ask yourself this question,

  What do I want to be when I grow up?

Lifestyle company where I make a nice living and do what I want or big splash that has a shot at Google type returns. That's going to determine your money raising strategy along with your current capital position.

Now, if someone came to you and said "I have a bucket of money I want to give you." Well, that's a little different. I tend to never reject an investment unless the terms are so out of control that I can't run the company the way I want to. So, it's a tough call.

Good luck.

Part of your answer is also on the market size. If your potential addressable market size is large then considering a VC route is more important as you will likely end up with more competition.

The prevoious postings are correct - it is ultimately up to you and how you want to grow your company.

However,one of the questions you need to answer is: How large a commpany does your BP state? If your looking to build a company to 50-100 mil by year 5 then your BP and related financials should tell you what you need for funding. If you have not done a BP and 5 year financial forecast then your missing the front end structure to a start up

ie: you have no initial roadmap - NOT GOOD.

If the financials tell you you need more than 5.0 mil then your going to have to talk with VCs.

Less than that Angels.

Here is the problem in todays investment market the VCs are not funding A rounds.

SO if you need over $5.0 mil then your going to have to do 2 funding rounds, or if you can find an Angel willing to syndicate the amount over their comfort level.

Do not use VCs or Angels unless you absolutely have to.

Not all investment is equity investment.

The other responses are correct: for certain types of growth, and certain types of business plans, VCs and angels are the way to go. But in my experience, venture capital is suitable for a much smaller percentage of startups than is generally believed. Furthermore, as Ted pointed out, early stage investment is quite rare these days.

Let's assume for the moment that you've already exhausted the friends-and-family pool. You have a working product -- great! As the VCs used to say to me when I was going this route: "So what do you need us for? Just sell!" Gee, thanks. :)

As you and I know, you actually do often need money to change the trickle of customers into a flood. But if you have a working product and real customers, it is often best to look at other kinds of arrangements to enable you to raise capital in a non-dilutive manner:

• Licensing: Is there a strategic partner out there who would like to include your product in their offering? Often a partner will prepay for a certain number of licenses, giving you the cash flow you need to grow your business.
• Distribution: Is there a geographic region (say, Europe) or a vertical market (say, government) that somebody else could sell into more easily than you? Again, frequently you can get some cash up front in this type of arrangement.
• Customer pre-payment: Would one or more of your customers consider pre-paying their subscription or licensing or maintenance fees in exchange for a discount?

The point is, although venture capital is an important tool in many settings, usually there are other options as well. Make sure you've considered your alternatives before selling off pieces of your business.

Good luck!

Scott

If you've read the answers above and decided that VC is the right option for you, approach as many as possible as early as possible. You'll probably get the answer that it's too early for them to invest, but you'll also get insights on what it is they're looking for and you can build your company so that it matches their criteria for an investment-worth startup as soon as possible.

This will also give you a chance to build a relationship. Raising money takes a lot of time and effort and ultimately depends on whether investors trust you as an entrepreneur. Building a relationship with potential investors and then keeping them posted on your progress, showing traction over time will pay off later on.

Most companies should never raise venture capital (and I'm a VC!). It is reserved for a rare breed of company that can achieve a large revenue base in a short period of time and should only be considered when you're sure you're on that trajectory. If you're not convinced then you should really focus on angel money.

I've written a post on the topic: Should You Even Raise VC?