When to Pass the Hat
Skip to content
Entrepreneurship Strategy Oct 5, 2015

When to Pass the Hat

Strategic timing can help startups get the most from their fundraising.

An entrepreneur ponders his startup funding strategy


Based on insights from

Joe Dwyer

New venture funding is not what it used to be. It’s not that money from family and friends has dried up, or that angel investors have stopped angel investing.

But having spent more than two decades as a serial entrepreneur and venture capitalist, Joe Dwyer has seen changes to the funding life cycle that can make it tougher than ever for entrepreneurs to stay afloat.

“Many times entrepreneurs are living hand to mouth,” says Dwyer, an adjunct lecturer in innovation and entrepreneurship at the Kellogg School and a partner at Founder Equity and Digital Intent. “They’re constantly fundraising.”

Add Insight
to your inbox.

And so, Dwyer argues, it is more important than ever for entrepreneurs get their timing right when seeking funding.

Picking Winners by the Finish Line

It used to be that the whole idea of venture capital was high risk, high reward, with money being invested to help companies stabilize and scale. But a new trend has emerged in the last two decades, where venture capitalists are waiting until later in the risk curve to make larger investments in the companies that are showing the most promise. Dwyer compares this to picking the winners of the race just before the finish line, rather than when all the runners are still in the blocks.

“The trend towards increasingly large venture capital funds is not just in the aggregate size of the fund, but in the amount of dollars per partner,” Dwyer says. “When more dollars are allocated to each partner to invest, they don’t magically find more great deals, or do more efficient diligence. They’re usually just putting more dollars to work in the same number of investments.”

Part of the reason venture capital funding has moved later in the risk curve is that investors often lack the time and resources to devote to understanding the complexity of some businesses, Dwyer says. So investors wait to see how those companies suss out, which is rational, but problematic for the startups.

Many venture capitalists are also holding out until companies reach the break-even point. “That’s not what you’d normally expect to hear from a venture capitalist, right? Yet it is all too common these days.”

With venture capitalists unable or unwilling—and a little bit of both perhaps—to invest in riskier businesses that typically characterized venture capital investments prior to the last 10 or 15 years, Dwyer says, “there’s a shift in allocation, and I think somewhat of a misallocation.”

That trend has opened up a hole in the market, which has largely been filled by angel investors, some of which are organizing into quasi-institutional “seed venture” funds. This multilayered funding environment is obviously helpful for companies, but with venture capital entering the game later, many companies have to seek round after round of angel funding, passing the hat almost constantly in their middle stages.

Illustration by Karen Freese

Surviving the “Innovation Wasteland”

Though harder to come by, access to capital is no less pressing. Even if a company is frugal, successful operations demand increasing resources. “Suddenly, you’re faced with this challenge of saying, ‘We’re growing, it’s working, and now I need to go get more money.’ You think at that point you’d have relatively easy access to capital from professional investors, but unfortunately, that’s not always the case.”

“We call it the innovation wasteland,” Dwyer says. “You’re alive and kicking, moving forward, and making some real value, but nobody seems be willing to pay attention to you.”

This makes when companies go about raising capital so important. Dwyer offers three tips for entrepreneurs who want to nail their timing.

Define the Measurable Parts of the Business. There is already plenty of uncertainty—and often a fair amount of bluster—involved in any startup. Establishing realistic and consistent measurables is critically important to demonstrating to investors that the company can combine a vision for the future with a view into the current reality.

Most critically, investors will want to understand the fundamental unit economics of the business—so learn them inside and out. “Far too many entrepreneurs have no idea about some of the basic economics, and that’s not a good sign,” Dwyer says. “Early-stage entrepreneurship is about turning uncertainty into risk. If you can’t put numbers to every aspect of the business, it’s very hard to put the level of risk in a box. So if you cannot come in and explain the fundamental unit economics of your startup to an investor, you don’t deserve funding.”

Fundraise Around Milestones. Timing fundraising around measurable milestones—when the business is accomplishing a calculable reduction in risk or uncertainty—can maximize the efficiency of that fundraising.

“Because you’ve proven something, there’s a recent and abrupt increase in the value of your company,” Dwyer says.

Dwyer recommends aligning entrepreneurial and innovation activities around milestones that are both externally and internally visible. That allows a company to plan operations—making sure there is enough money in the bank to pull the milestone off—and fundraising—timing the next round of fundraising to capitalize on the momentum generated by the win.

Give Yourself a Cushion. Finally, companies should avoid cutting it too close when it comes to fundraising. Market cycles, funding environments, the departure of a key team member, or a blip in any area of design or production can wreak havoc on scheduling—and fundraising—plans.

“Don’t go fundraise when you need money or else,” Dwyer says. “You should allot six months to fundraising, because if you don’t have the money to last those six months, you’re going to put yourself in a pretty awkward place.”

Every company should also have a plan in case funding dries up or never arrives—a rainy day fund or an exit fund.

“It’s tempting not to keep a cushion because you’re going to optimize your own economic returns potentially by waiting to get money until you’ve made as much progress as possible,” Dwyer says. “But you’re also taking a risk when you do that. I would say, don’t jump off the cliff without a parachute.”

Featured Faculty

Adjunct Lecturer of Innovation & Entrepreneurship

About the Writer
Fred Schmalz is the business editor of Kellogg Insight.
Most Popular This Week
  1. How Much Do Boycotts Affect a Company’s Bottom Line?
    There’s often an opposing camp pushing for a “buycott” to support the company. New research shows which group has more sway.
    grocery store aisle where two groups of people protest. One group is boycotting, while the other is buycotting
  2. 5 Takeaways on the State of ESG Investing
    ESG investing is hot. But what does it actually deliver for society and for shareholders?
    watering can pouring over windmills
  3. Could Bringing Your "Whole Self" to Work Curb Unethical Behavior?
    Organizations would be wise to help employees avoid compartmentalizing their personal and professional identities.
    A star employee brings her whole self to work.
  4. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  5. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  6. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  7. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  8. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  9. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  10. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  11. 3 Tips for Reinventing Your Career After a Layoff
    It’s crucial to reassess what you want to be doing instead of jumping at the first opportunity.
    woman standing confidently
  12. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  13. Podcast: Does Your Life Reflect What You Value?
    On this episode of The Insightful Leader, a former CEO explains how to organize your life around what really matters—instead of trying to do it all.
  14. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  15. In a World of Widespread Video Sharing, What’s Real and What’s Not?
    A discussion with a video-authentication expert on what it takes to unearth “deepfakes.”
    A detective pulls back his computer screen to reveal code behind the video image.
  16. College Campuses Are Becoming More Diverse. But How Much Do Students from Different Backgrounds Actually Interact?
    Increasing diversity has been a key goal, “but far less attention is paid to what happens after we get people in the door.”
    College quad with students walking away from the center
More in Entrepreneurship