03/18/2014 02:20 pm ET Updated May 18, 2014

Should You Raise Another Round for Your Company?

As the CEO of a fast-growing company, deciding whether or not to raise more funding can be a tricky decision. Sure, if you're out of cash, you don't really have a choice. But, more often than not, an entrepreneur must choose between raising another round, riding it out on what's in the bank or surviving on revenues.

Deciding when, from whom and how much funding to raise is all the more challenging in an emerging sector, because there are few precedents. If you're in a new and extremely fast-growing category, how do you value your business, predict growth trajectories, plan for an exit or compare yourself to competitors? Take the social software space for example: It is a bit like the Wild West. A few startups have attained high-profile acquisitions (Buddy Media, Radian6, Wildfire Interactive, etc.), while others have remained private and grown quickly or are thriving in smaller niche markets.

I've led fundraising rounds at several companies, so I've faced many tough choices and learned a few lessons along the way. If you find yourself asking, "When is it time to raise more money?," here are three guidelines to help you make the decision:

1. Assess your market opportunity.

Before you decide to raise a Series A, B or C, you first have to understand exactly how big your market opportunity is. If you are in a potentially huge, multibillion-dollar market, it makes sense to raise more capital, take on more risk and go for the big prize. If you're in a smaller vertical market, it may not make sense to take on more venture funding, and instead grow organically.

To get a clear sense of your market size, think about all the industries that could use your product and then what percentage of companies in these industries are target customers (is your product for SMBs, mid-size companies or large, global brands?). Ask yourself whether you're building a ubiquitous product, or something more niche; you don't need as much capital if you're taking on a highly-targeted market. Many industries can be massive and varied, from small point solutions to large enterprise plays, so it's important to think about where you fit into the market and what your sales goals are.

2. Think about your exit.

Smart entrepreneurs focus on building a great business -- and not on how and when they will sell their companies or go public. However, it's critical to envision your exit goals early on, because they will inform your fundraising decisions.

If you want to IPO one day, you'll need to raise a lot more money than if your exit strategy is to be acquired. (Of course, whether you are IPO material depends on what you find out in step one above, because you must serve a large, multibillion-dollar market to make it as a public company.) If you hold out the hope of a potential IPO, it's not just important to raise a significant amount of venture funding, but also to raise it under the right conditions and with the right investors. If you would be happy with an acquisition under $100M, then it makes sense to raise less capital and scale through customer acquisition and revenue growth.

3. Make sure you have the right investors.

Who you raise money from is important and defines your growth strategy. Some companies go after smaller vertical markets and are funded by super-angels and smaller VC firms, and that makes perfect sense for that type of growth strategy. Entrepreneurs in this boat may want to think twice about raising more capital, because they may not need it to reach their growth and exit goals, and may lose too much equity in the process. They should stay small and stay focused.

If you are going after a large, multibillion-dollar global market, you need investors who align with that goal: Top-tier venture investors that are willing to put up substantial capital to help you meet your ambitious goals. Whether you go after "small player" or "heavy hitter" venture funds depends on your long-term goals. Find investors aligned with your long-term vision and they will help you determine whether more financing is needed along the way.