When is the right time to raise capital?

I have a friend who is pursuing a new direction with his business and was looking for some advice.  His existing business has been operating for many years and he has been boot-strapping his new venture.  It looks like he was able to get validation for the idea and even has a few paying customers.  He has used the cash from his operating business to bootstrap this new venture and it looks like he really has a shot at bringing a very innovative (and disruptive) solution to market.  His challenge is to figure out when he should seek financing to support the opportunity.  He could probably continue to nurture the business along and do well however to really capitalize on the opportunity he needs to pre-pay the expenses that come along with capturing a market.

It’s an interesting question/challenge he poised.  I told him to take a pass at some simple projections to determine where the big cost hurdles are going to be as he scales his business.  If he can bootstrap the idea until the hurdles are within his line of sight he may be able to save some equity and may come across some different opportunities to fund his business.  Without having a sense of what capital commitments he will need to make I think it would be difficult to raise money and feel like he is getting the right deal.  Conversely, not raising capital could result in him missing opportunity.  In my experience I have seen business owners borrow money in the form of term debt or convertible debt to preserve equity only to end up personally backwards when the business venture fails and the lenders are seeking recourse to the owner.

If you have some experience answering this question or if you would like to chime in, feel free to leave some comments.  They certainly would be appreciated.

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