The number one job of a startup CEO is to secure funding for his or her company. Most early stage startups need external investment to cover costs, so without funding, there is no company. The number one question a startup CEO needs to be able to answer is "how are you going to get to the next round of funding?" If there is no credible answer to that question, there is going to be a very unpleasant road ahead. I ran out of money at JRad, and didn't run out of money at ActiveGrid, and believe me, there's a big difference! Following are the three variables at the disposal of a CEO in order to secure the next round of funding: timing, traction, and positioning.
Timing - Startups generally have 12-18 months of cash between funding rounds. You have to raise money while you still have 6 months of cash in the bank or you are going to get tooled as potential investors wait you out in order to increase their leverage. The math is simple: if there is 12 months of money in the bank, 12-18 months - 6 months = 6-12 months, leaving 6-12 months to get the business to a point where it is set up to raise its next round of funding. 6-12 months is not a long time, which is why startups have to move at a very accelerated pace.
Traction - The best way to raise money is to grow revenue quarter to quarter, hopefully exponential revenue growth. If the market is still maturing and the revenue has yet to materialize, an exponential growth of users that will one day lead to revenue is the next best thing to revenue. Generally a market category will have a ratio to apply to these metrics to value a company, such as 6x trailing revenue or $1/user, so you can point to other deals to establish the value of your company.
Positioning - If neither revenue or user growth is in the cards before the 6 month window hits, all that is left is positioning. In this case, everything in the company needs to line up to the 6 month funding window so that you can have a credible story as to why your startup is going to capture a high-growth market. Tools you can use include shipping early access versions of new technology in a new market or on a new platform, guerrilla marketing campaigns to get buzz, and partnership deals where other companies leverage your technology.
Not following the guidelines above will usually lead to very unpleasant situations like shut downs, fire sales, and down rounds. If you do not have enough time before the six month window hits, take the financing hit early while you still have 12-18 months of money in the bank and some leverage. Your existing investors may extend your last round to give you a bit more runway, but only if there is a credible story as to how the company is going to achieve the necessary traction or positioning with the new timing based on the bridge capital. As a VC that I once had on my board liked to say, "we do bridges, but we don't do piers."