(Editor’s note: Clate Mask is the co-founder and CEO of software company Infusionsoft. He submitted this story to VentureBeat.)

While many entrepreneurs dream of raising capital from the outset, the reality is that most startups must be bootstrapped long before an angel investor or venture capital firm will give them the time of day.

At Infusionsoft, we bootstrapped the company in the beginning and eventually secured $17 million in two rounds of venture capital funding.

As we worked up to the venture capital level, we were obsessive about growing  customers and revenue (thus taking risk off the table for future investors). Early on, I saw this as the most effective way to both raise money and hold on to shares of the company. I fell in love with the idea of only taking as much money as necessary to get us to that next stage of business.

In doing this, we noticed we went through four steps of financing:

* Banks: Small credit lines allow you to discover your market
* Friends/family: Once you’ve got the market identified, this funding allows you to develop a prototype
* Angel: Once that was complete, we secured $1 milllion to prove the prototype
* Venture Capital: This money allowed us to scale the business and become profitable

By the time we got to the venture capital stage, we had a number of investors that were interested in us, because of our recurring revenue.

When you get right down to it, getting funded is a risk/reward proposal to the investor. You can either work really hard on the risk part of the equation (i.e. have revenue) or you can focus on reward (i.e. ‘we have the next Google’). The biggest challenge an entrepreneur faces is you must present an equation that is makes sense to investors.

In this economy, revenue is the most compelling argument you can make. Investors are nervous – and work hard to mitigate risk (much like banks). Investors that historically could be counted upon to put more money into the VC funds are often no longer able to do so – meaning VCs don’t have as much freedom to focus on the risk.

The timing for our series B fundraising round could have been better. We began loosely talking about beginning the search for a second round in the summer 2008, but actually went out in early September. In hindsight, we should have gone out a month or two earlier – because by that time the economy was in crisis mode.

Turns out my approach to getting just enough money for each stage proved to be less than prudent in this case, as it prevented us from going out at the right time in the market.

We didn’t need to raise any money when the market was good, but by the time we decided it was time, the market was three weeks away from collapsing. Ultimately, we probably would have raised more cash for the same equity had we gone out a month or two earlier.

The big lesson: only take the money you need to get to the next round – with the caveat that you need to pay attention to what the market is doing because it’ll affect your valuation.

Taking money down the road may be more expensive than taking less now. So even if you still have plenty of cash in the bank, you need to watch what the market is doing and understand how that impacts your valuation.

The other lesson learned is the importance of selling. When you don’t have cash in the bank, you’d better know how to sell. It’s amazing how many entrepreneurs who raise capital are great in academic discussions but terrible on a sales call. The art of persuasion is not what business school is teaching, but it’s what drives the success of the business.

Often when you have raised VC, it’s easy to fall into the “strategy” trap. That’s where the team spends most of its time engaging in relentless discussions on strategy and big ‘game-changing’ things, which is fine, but who’s selling? When you haven’t raised VC you get your butt on the phone and you persuade people to buy your stuff. That’s what we did in the early stages of Infusionsoft, and despite our two rounds of venture capital funding, we still make sure to keep that part of the business running without interruption.

Selling is what drives the business. It also drives an efficient use of your VC firm’s capital later on.

The bottom line? Get customers, show revenue and prove your model first. That’s easier said than done, but in the end, it’s the best, most viable way to getting the capital you need to take the business even further.

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